How can investors and financial institutions across the APAC region amplify climate action? That was the question at our recent Capital for Climate Action APAC Conference, which gathered owners and managers of assets, lenders and companies from across the region to address both the opportunities and ongoing challenges that define this critical moment in the low-carbon transition.
Discussion centered on APAC’s unique role in the global shift to a clean-energy economy, financing decarbonization, the usefulness of looking beyond emissions, the role of the capital-markets ecosystem, the value of nature, and the importance of action. Here are some of the biggest takeaways from the conversation.
The APAC region’s outsize role in the climate transition
The APAC region is more important than any other for reaching net-zero by 2050, observed Baer Pettit, MSCI’s president and chief operating officer. “On the one hand, APAC accounts for about 40% of global emissions, and more than three-quarters of coal-fired power generation. On the other hand, it also accounts for a massive share of low-carbon and green innovation.”
- Though the region comprises diverse economies, three characteristics “make it very advantageous for taking climate action,” Linda-Eling Lee, head of the MSCI Sustainability Institute, noted. “Investors in this region are more pragmatic, they are more willing to embrace experimentation and try new financing structures, and there is public and private sector alignment that means less friction between policy and practice.”
Financing decarbonization
“Our whole investment program is on a sustainability footing,” explained Mark Konyn, group chief investment officer at AIA, citing the insurer’s alignment of its credit and equity teams, its governance, its recent decision to exit thermal coal, and even the company’s requiring everyone in its investment office to have taken the CFA Institute’s training course in ESG investing.
- The transition “looks very different across different clients in the region,” reported Sunita Subramoniam, APAC head of sustainable product strategy, iShares and Index at BlackRock, who added that decisions about capital allocation start with “the part of the capital stack you’re looking at.” “So let's say you're looking at public equities, fixed income and real estate,” she suggested. “Do you want to simply exclude or do you want to take things a little bit further along in the spectrum of sustainable and transition investing?”
- In the past year “a lot of financial institutions have really started to understand the importance of transition planning,” observed Yuki Yasui, managing director, Asia-Pacific Network, Glasgow Financial Alliance for Net Zero (GFANZ), citing financing strategies mapped out by GFANZ that demand “an institution-wide approach.”
- There are “obviously going to be leaders and laggards within each sector, and then you move on to companies that are benefiting from or contributing to the transition,” Subramoniam noted, adding that “it's not binary; companies can be in all of these categories or some of these categories.”
- “I don’t think people really understand the concept of stranded assets,” suggested Konyn, who noted that AIA last year began to exclude companies involved in providing coal-fired power or mining from its portfolio. “We redeployed those resources, on a proactive basis, in companies that can make the transition.”
- At the same time, engagement matters, he added, citing AIA’s dialogue with a power company it had removed from its portfolio but later financed after the company “restructured its resources and came back to us with an opportunity where certain assets had been ring-fenced and where we could, with real conviction, put money to work around the transition that we felt had credibility.”
- Carbon credits are poised to play an integral role in financing a managed phaseout of coal, suggested Yasui, citing work by the Monetary Authority of Singapore to use transition credits as a complementary financing instrument.[1] “Whether we can get high-integrity credits might be what seals the deal,” she observed. “It’s super-important to get this right.”
The importance of action
“Disclosure is not performance and reporting is not action,” stressed Eric Nietsch, head of sustainable investing, Asia at Manulife Investment Management, who credited a blog post from MSCI Research for shaping the asset manager’s views on emissions in the value chain. “If you're waiting for the perfect dataset, you're never going to do anything,”
- “It’s not letting perfect be the enemy of good,” agreed Jaclyn Dove, head of strategic initiatives, sustainable finance, Standard Chartered Bank, which set its targets on activities in hard-to-abate sectors that it will and will not finance. “It’s client by client and product by product,” she noted.
- “We want to make our climate targets come to life from a balance-sheet perspective,” explained Priya Bellino, head of the sustainability solutions group, Asia Pacific, Sumitomo Mitsui Banking Corporation, adding that while she and her colleagues examine national energy roadmaps, scenarios, and the alignment of customers with science-based net-zero pathways, “if we wait until that perfect scenario for Thailand, Malaysia or Indonesia, we're not going to have done anything.”
Looking beyond emissions and closing gaps
While corporate disclosure is improving, “there aren't really country scenarios,” noted Dove. “We take into consideration in our own modeling some of the regulation in place, technology readiness and how the country in itself is decarbonizing, including its plans and their probability.”
- Nietsch noted the value of looking at indicators of transition risk in lieu of emissions. “If you’re working with an extractive company, what are the barrels of oil equivalents? What are the tons of coal? You can begin to use all of these other metrics as proxies for Scope 3,” he observed.
- Reporting by small- and medium-sized enterprises matters to the region, noted Anjali Viswamohanan, director of policy, Asia Investor Group on Climate Change (AIGCC), citing the disclosure gap between SMEs and their large-cap counterparts. Simplified sustainability reporting guidelines like those issued by regulators in Malaysia can help, she suggested, as can “creating more forums for SMEs to actually engage with each other and understand what sort of data can be put out there.”[2]
- The “very long tail of small and medium companies” is an area that MSCI hopes to bring some solutions for in the near future, Pettit said.
An ecosystem of support
Three pillars can inform development of the region’s ecosystem of support for climate capital, suggested Boon-Chye Loh, chief executive officer of SGX Group. Transparency and the availability of data, in which “exchanges are at the forefront of standardization” that can narrow differences between countries; development of the ecosystem itself; and “interconnectivity among exchanges” that would improve market access.
- The critical focus for MSCI, Pettit noted, “is providing the greatest insight into the risk and returns of exposures that have a climate tilt.”
- “How do we translate the path to net-zero as a means of unlocking shareholder value,” said Loh. At the same time, he added, “many asset owners are new on the path of de-risking, not just a portfolio but in finding new investment opportunities to enhance their portfolio.”
Integrating nature
“Nature works for free but its services are undervalued and overexploited,” stressed Sylvain Vanston, MSCI’s executive director for climate-risk research, suggesting that investors can’t work on climate and biodiversity in sequence. “Solutions exist, there is no excuse for inaction, the journey has to start now,” he added.
- “Conversations on nature and biodiversity depend on the sector, the country and the size of the company itself,” observed Melissa Moi, head of sustainable business, group corporate sustainability officer at United Overseas Bank Limited (UOB). “Most of us are quite early in our journey of trying to understand the risks and opportunities and how we start integrating nature and biodiversity into the conversations that we have with clients.”
- The risks from biodiversity may not always be what they appear, Moi added, citing UOB’s clients in commercial real estate. “Singapore is the world’s largest importer of sand from Malaysia, Indonesia and Cambodia. So when we start thinking about nature in terms of the second-order effects in your value chain, that's when the conversation becomes a little bit different.”
- “Rebuilding nature is five times more expensive than preserving it,” noted Mikkel Larsen, chief executive officer of Climate Impact X. “When clients get that observation, they realize there is some logic for why we should try to preserve before we actually rebuild.”
- Clients get a better outcome with the Taskforce on Nature-related Financial Disclosures (TNFD) when they “see it as a risk exercise, not as a reporting exercise” and avoid overcomplicating it, Larsen added. “Do a rough and dirty analysis and you’ll get the 80/20 rule right and start to see your exposures,” he suggested.
- The availability of TNFD-related data can present a challenge, underscored Vanston, who suggested that for a share of such metrics, “investors will need to get comfortable with proxies for some time.”
- Pragmatism matters for driving real decarbonization or preservation of nature, noted Moi, who stressed the importance of viewing the conversation from a regional perspective, citing APAC’s outsize exposure to biodiversity risk. “The narrative around target-setting needs to focus on closing the gap instead of getting scolded for breaching that line.”
- “I come back to my statement from before that we can make this extremely complex and we'll get nowhere or we can try to be practical,” Larsen agreed.