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Senior financiers in Asia are calling for more alignment of
international sustainable finance regulations—but opinions
differ on how common taxonomies and reporting standards will
look.
With 90% of the global GDP covered by pledges to reach net-zero
emissions later this century (mostly by 2050), countries and
industry bodies have started exploring what constitutes
decarbonization projects and how companies should disclose their
climate-related performances in earnest.
The UN-backed Green Finance Platform recorded
125 new policy and regulatory measures worldwide from the public
sector alone in 2021, the highest on record and bringing the total
to 684 at end-December.
In a virtual conference held by the Institute of International
Finance (IIF) earlier this month, financiers from China, Japan, and
Singapore said more regulatory alignment would be required for them
to better identify the projects that can put the world on a
net-zero path.
"We rely on a taxonomy to know whether our borrowers' activities
are green, brown [contributing to climate change], or
transitional," Agricultural Bank of China Chairman Gu Shu said. "I
see the need for a set of taxonomies that could be used
globally."
An IIF study based on ECOFACT data
suggested 24 jurisdictions across the globe are developing green
taxonomies. China and the EU—two of the world's largest GHG
emitters—published an initial report last November that could
lead to a common taxonomy.
"Hopefully, more jurisdictions will join us to achieve a common
goal," said Gu, whose bank is owned by the Chinese central
government.
Separately, the number of industry initiatives aimed at
enhancing companies' climate disclosure standards is growing. The
Task Force on Climate-related Financial Disclosures' (TCFD)
recommendations are widely used, but many companies have also
adopted the Science Based Targets initiative or CDP standards.
Some argue that because those initiatives have different focuses, they
complement one another, but Gu suggested he would prefer uniform
reporting requirements for companies.
"There are too many frameworks being used around the world … The
information produced by companies is all over the place," said Gu,
adding that multiple or even competing disclosures could be
confusing and incomparable despite companies' best efforts.
During COP26 last November, the International Financial
Reporting Standards Foundation launched the International Sustainability
Standards Board (ISSB) to develop a global baseline for
sustainability disclosure standards. The TCFD and CDP frameworks
are to be taken into account by the ISSB.
"This may resolve part of the issues, and I hope this [baseline]
will come up quickly," Gu said. "We really need one set of
disclosure standards that can be used globally to foster
consistency."
Circumstances vary
But Gu and some others also see strong challenges from
introducing common taxonomies and reporting standards across the
globe, with each country having its own economic conditions, power
mix, and decarbonization roadmap.
"We should respect [the] differences," said Gu, adding that
market situations and legal regimes could be different
everywhere.
Kanetsugu Mike, chairman of Japan's Mitsubishi UFJ Financial
Group, said a global regulatory framework for sustainable finance
should maintain flexibility "by sticking to key principles."
"The situations vary from country to country. So a
one-size-fits-all approach will not work … There should be a common
goal, but different pathways," he added.
Mike also believes any common framework should allow
transitional technologies. In Japan, the government is developing a
"transition taxonomy" to define
the activities that can transform high-carbon projects to
low-carbon ones, including energy efficiency projects.
"Europe, the US, and Asia are widely different in their
[decarbonization] pathways and timelines," Mike said. "Asia will
see further population growth and a tremendous increase in
electricity demand."
"Fossil fuels, such as oil and coal, account for about 80% of
the energy mix in the Asian region … [And] power-generating plants
are relatively new and, frankly speaking, difficult to
decommissioned immediately for the region to keep access to
necessary energy sources.
"To achieve net zero there, we require a greater effort and the
gradual transition over a long period," said Mike, adding that he
supports "transition finance with Asian characteristics."
However, Aberdeen Standard Investments' Asia-Pacific CEO René
Buehlmann said sustainability finance regulations should be
"harmonized globally as much as possible" to help the world counter
climate change.
"What is quite important for us is regulation does not have too
much room for interpretation, because that's when greenwashing
comes into play," said Buehlmann, who is based in Singapore. "And
we all don't want that, because that would be, from our
perspective, a truly industry failure."
He admitted it could be difficult to establish common rules
across countries, let alone regions. "We have very different
developmental stages even within Asia … To align regulation across
the region is quite a big challenge," Buehlmann said.
With the lack of harmonization, there are difficulties aligning
the green standards among the portfolios worldwide for an asset
manager that operates globally like Aberdeen, he said. "Needless to
say, it's incredibly challenging to bring this all under one
roof."
Financiers' net-zero drive
A total of 450 banks, insurers, asset owners and managers,
financial services providers, and investment consultants with $130
trillion at their disposal have joined the Glasgow Financial Alliance for
Net Zero (GFANZ), pledging to align the emissions from their
portfolios with the Paris Agreement's climate goal.
The Asia Investor Group on Climate Change (AIGCC), an industry
body affiliated with the GFANZ through the Net Zero Asset Managers
initiative, said the lack of tools to measure and report on
decarbonization effects remains a primary concern in the
region.
According to its annual survey of 20 fund managers and owners
active in Asia overseeing $6 trillion in assets, 45% highlighted
this deficiency as the top barrier to investment last year. This
compared with 56% in 2020.
The concerns could result from "imperfect market information and
lack of alignment in green taxonomies across different Asian
countries and internationally," the AIGCC said in a report. "However, compared to
previous years, investors have found how and where they can
continue to make positive progress around climate integration in
their portfolios … all the while ensuring their fiduciary
responsibilities are upheld."
"Despite a lack of reporting requirements from clients, they
already disclose their targets and carbon footprinting in annual
climate reports," the AIGCC added. Seventy percent of the survey
respondents said they followed the TCFD recommendations in their
climate reporting.
Posted 14 March 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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