How Asia’s investors can help combat climate change

Government and individual efforts need to step up a gear, if the impact of climate change is to be beaten. To limit global warming to 1.5°C, global carbon emissions need to fall to 55% of 2010 levels by 2030 - and continue a steep decline to zero net emissions by 2050.[1]

According to the United Nations (UN), globally, cities consume the vast majority of the world’s energy, at 78%, and produce more than 60% of greenhouse gas emissions. But collectively, these cities make up just 2% of the earth’s surface and by 2050 a further 2.5bn people will live in urban areas, with nearly 90% residing in Africa and Asia.[2]

The UN has warned that climate change is now affecting every country on every continent - it is disrupting national economies and affecting lives, costing people, communities and countries dearly today and even more tomorrow.

Economic progress

Everyone has a role to play in the fight against climate change, both individually and collectively. As investors, there are opportunities to potentially help influence and have a greater contribution to what is being done to mitigate the damage currently being done to the planet.

The Intergovernmental Panel on Climate Change has stated that to reach a 1.5-degree world, the average investment in the energy system needs to be around $2.4trillion per year between 2016 and 2035, representing around 2.5% of global GDP.[3]

However, cities around the world are taking measures to cut their greenhouse gas emissions and are putting policies in place, which are encouraging greater use of alternative energy sources. [4]

Asia has a unique exposure to climate change – there are many low-lying regions at risk from rising sea levels while densely populated areas also mean high cost risks from extreme weather events. According to the World Bank, much of the continent’s emissions come from the power sector, where installed power generation capacity is expected to double by 2030 due to steady economic growth and rapid urbanisation.[5]

Notably China, the world’s most populated country with more than 1.4bn inhabitants, is also the globe’s biggest polluter.[6]

The rapid economic development over the past four decades has turned China into the world’s second largest economy, which in turn has lifted hundreds of millions of people out of poverty. This economic success, however, has come at an immense environmental cost. It is estimated that the economic and social costs associated with China’s air, water and soil pollution, along with the ensuing changes to the climate, could amount to 3% to 6% of its GDP.[7]

To address the environmental issues, China has started to rebalance its economy. It appears to be moving away from the highly-polluting, energy-intensive and investment-driven growth that has characterised its development in recent years towards a greener, more efficient and sustainable system, powered by consumption and services. The Chinese government has set ambitious targets to reduce carbon emissions and lift the energy efficiency of the economy in its 13th Five Year Plan. To achieve these goals, the People’s Bank of China (PBoC) estimates that an annual investment of at least US$320bn - $640bn will be required.[8]

Green bonds

The world of responsible investing, where environmental, social and governance (ESG) factors are firmly woven into investment decisions, is rising rapidly. This is especially evident in the green bond sector, an asset class China has embraced wholeheartedly.

Green bonds make up a minor portion of the global bond market – however, they are widely anticipated to gain further traction, especially across Asia. Green bonds were developed to finance projects specifically focused on targeting a positive environmental impact. They enable companies to emphasise their climate-friendly projects, and can widen a company’s investor base, as issuances usually experience stronger demand than standard bonds.

China issued its first green bond in 2016 and now has the second largest green bond market globally; altogether it makes up more than 70% of developing market green bond issuance to-date. In the first half of 2019, total green bond issuance from China reportedly went up to US$21.8bn, a massive 62% year-on-year increase, which was primarily down to contributions from regional banks and the private sector. Over 2019 and 2020 it is expected that Indonesia, Malaysia, Philippines, Thailand and Vietnam will be issuance ‘hot spots’ in Asia, according to the Climate Bonds Initiative.[9]

Hong Kong is getting in on the action too. In May 2019, in a bid to establish itself as a green finance hub, it issued its first ever green bond. Its $12.74bn scheme – one of the biggest in the world - aims to fund projects around air quality and clean transportation, among others. [10]

 

The battle ahead

Green bond issuers are expected to clearly identify the projects that they will finance upfront and provide reports that monitor each project’s environmental benefit. This transparency of proceeds is a key feature of green bonds as it enables investors to assess the positive impact of their investment and to measure their performance beyond just financial returns.

Nonetheless, the benefits of the green bond market go beyond transparency and environmental deliverables. As the overall market has expanded, so too has the diversity of issuers, regions and sectors available to investors.

Investors need to take note that currently, there is no compulsory international taxonomy for what constitutes a green bond, nor common regulation. Therefore, there is the potential for issuers to make misleading claims – or ‘green wash’ about how environmentally responsible they are.

In this context, investors need to ensure they are truly getting access to green bonds – transparency is key, as it enables investors to assess the positive impact of their investment and to measure their performance beyond just financial returns.

But organisations such as Green Bond Principles and the Climate Bond Initiative have helped the cause, releasing guidance and standards, which now help issuers and investors enter this market.

Fundamentally as investor awareness rises in line with increasing regulation around environmental issues and climate change, the rapid growth already experienced in the green bond market could be just the beginning.

[1] https://www.un.org/sustainabledevelopment/wp-content/uploads/2019/07/Infographic-Climate-Action.pdf

 

[2] https://www.un.org/en/climatechange/cities-pollution.shtml

[3] Intergovernmental Panel on Climate Change – 2018

[4] https://www.un.org/en/climatechange/cities-pollution.shtml

[5] https://www.worldbank.org/en/news/opinion/2016/05/03/asia-help-lead-way-change-course-climate-change

[6] http://worldpopulationreview.com/countries/

[7] Cost of Pollution in China”, The World Bank, February 2007 (http://documents.worldbank.org/curated/en/782171468027560055/pdf/392360CHA0Cost1of1Pollution01PUBLIC1.pdf)

[8] Jun Ma, PBoC’s ex-chief economist, “China’s Central Bank wants private capital for green investment”, CNBC’s interview, 25 February 2016

[9] https://www.climatebonds.net/2019/03/climate-bonds-launches-green-bonds-state-market-2018-report-london-annual-conference

[10] https://www.reuters.com/article/us-hongkong-green-bond/hong-kong-looks-to-raise-up-to-1-billion-in-green-bonds-idUSKCN1SR0AS