Asian financiers want more alignment of green finance rules, but differ on how to achieve it

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.