Friday, 14 June 2024

Financial institutions propel Asia’s complex green transition

5 min read

By Franz-Josef Murr

Asian economies are grappling with the complex task of aligning carbon-intensive infrastructure with global environmental, social and governance priorities

  • Engineering solutions to a unique dilemma
  • Financing the transition
  • Using green bonds effectively

Developing economies across Asia find themselves at a critical juncture, with many having invested heavily in establishing carbon-intensive energy infrastructure in recent years.

India, for instance, has 281 operational coal plants and is in the process of building a further 51. For those engaged in a process of industrialisation, supporting growth and expanding middle-income societies are primary goals. However, reconciling existing economic ambitions with changing global priorities surrounding environmental, social and governance (ESG) initiatives is undeniably complex. 

Engineering solutions to a unique dilemma

Despite this substantial challenge, for many Asian economies, the growing global salience of the ESG agenda presents an exciting opportunity for early investment in sustainable solutions. Indeed, there has been notable progress over the last few years. Relocating manufacturing centres, promoting the circular economy, like a circular plastics system, and leveraging natural resources and more sustainable, legacy production techniques are just a handful of methods being adopted to promote sustainable development.

Several government-led initiatives are being deployed, with the International Green Development Coalition aiding ESG integration in China’s Belt and Road Initiative. India has committed two-thirds of its resources to “green recovery” through its National Action Plan on Climate Change, outlining eight national missions covering climate change and renewable energy.

Financing the transition

With change and adaptation afoot, businesses in Asia need to be equipped with the appropriate set of tools to manage the shifts and seize the opportunities presented by an ESG-driven future.

Financial institutions (FI) play a central role. Banks are positioned to significantly influence sustainable development, effectively allocate and channel capital. As of December 2022, the Asia Pacific region accounted for 4% of the $2.5 trillion assets in sustainable funds worldwide, in comparison to Europe’s 83%. Hence, the region urgently needs increased effective and tailored financing solutions to support its ESG ambitions.

China’s government banks, the largest bilateral creditors throughout the emerging markets, now offer debt swaps linked to sustainability goals, forgiving loans in exchange for investment in environmental conservation. Debt-for-nature deals such as these can act as an important method for helping local economies maintain their ESG objectives.

Meanwhile, Thailand’s bio-circular-green economy strategy aims to promote investment in renewable energy projects through tax-break incentives. One of the top banks in the country has announced a $3 billion plan to expand its remit from conventional banking to technology in a bid to enhance innovation, with several other local banks following suit.

Evidence suggests that these schemes are working, and Thailand is now one of the leaders in renewable energy across the region. Thailand also invests heavily across the globe, helping to finance green projects in Vietnam, Japan, Myanmar, and Australia. One project, sponsored by Japan’s Kansai Electric Power, aims to build the largest stand-alone rooftop solar panel in the world.

Using green bonds effectively

In an effort to incentivise and fund projects that specifically deliver environmental benefits and satisfy investor demand, the market has evolved to include products such as green bonds.

Green bonds are important for helping countries in Asia Pacific reconcile energy production strategies with continually expanding sustainability criteria. China’s expected issuance of around $120 billion worth of green bonds in 2023 aligns with its goal of carbon neutrality by 2060.

There is significant room for growth in this sector but achieving its full potential requires standardisation and wider global regulatory consensus. Nearly half of China’s green bonds issued in 2020 were not aligned with global criteria. Moving forward, consistent and credible policy signals from the Chinese government are essential.

The Japanese government supports carbon-intensive industries' transition to cleaner technologies through an innovative strategy promoting the issuance of transition bonds. To secure funding, the project requires high-emitters to demonstrate a realistic and science-based technology transition.

As Asian economies stand at a pivotal juncture in their pursuit of a sustainable future, the role of FI becomes increasingly crucial. Despite the challenges, strategic investments and an innovative approach position Asian economies to lead in the global ESG landscape.

 Franz-Josef Murr is the Regional Head for Asia at Commerzbank.

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