Asia could drive global climate transition: financiers

Solving the global carbon emissions challenge will require significant attention to the Asia Pacific region, panelists told a recent virtual conference organized by the International Capital Market Association (ICMA), given the region's share of the world's population and carbon dioxide (CO2) emissions.

The Asia Pacific region currently accounts for 43% of global CO2 emissions, and this figure could increase to 48% by 2030 if new efforts are not made to speed up decarbonization, said Feng Hu, sustainable finance research manager APAC at Vigeo Eiris, an environmental, social, and governance (ESG) consulting firm.

The top three contributing factors to CO2 emissions are electricity and heat production, manufacturing, and transportation, largely as a result of increasing urbanization in Asia, which is home to 60% of the world's population. Energy supplies in the region are largely fossil fuel-based, and coal accounts for nearly 48% of the region's total energy supply, according to Hu.

"These top three factors account for 88% [of] total emissions [in] the APAC [region]. They should also be the target sectors for climate transition," he told the virtual audience. "There are tremendous opportunities for APAC to become a driving force in this global climate transition movement. A lot of efforts are needed to decarbonize our energy supply systems."

Investment opportunities

Asian nations already are increasing their renewables capacity, and the region will drive 60% of the global energy demand growth between now and 2040, according to Hu.

"There are thus lots of opportunities in investing in energy-efficient infrastructure and systems. Additionally, all the infrastructure underpinning trade across the region from ports, airports to ships, will require investments to upgrade, decarbonize, and also to build resilience given the rising physical risk from climate change," he said.

However, companies in the non-energy sectors could face challenges in measuring greenhouse gas emissions for a number of reasons. These include complex industrial processes, various sources of emissions that are hard to monitor, and the lengthy supply chain across different sectors or where there is a wide range of activities.

Developing a credible climate change strategy

Regardless of how daunting the task may be, developing a credible climate change strategy supported by quantitative and measurable targets is the first step, Hu said. Companies can leverage existing standards and guidance to monitor, estimate, and report on their greenhouse emissions, such as the greenhouse gas (GHG) protocol, project-specific methodologies developed under the Clean Development Mechanism (CDM), as well as sector guidelines developed by international industry regulatory bodies, all of which are resources companies can adopt or follow.

"So, there's already a lot of resources for companies to tap into, to monitor, [and] to measure their emissions impact. Even if the measurement may not be comprehensive, it is still a good practice to clearly communicate the scope and type of greenhouse gases they produce and also the methodologies and the assumptions they use in measuring and reporting the emissions," he said.

The basic principles in ICMA's Climate Transition Finance Handbook are that climate transition finance needs to be the main driver of a company's current and future impacts, as well as forming the financial and material aspects of a company's current and future business models. The Handbook also recommends using the many existing accounting standards to help businesses in different sectors understand what "financial and material" mean.

The term "climate transition" describes companies that fall outside low-carbon-based activities but who have long-term decarbonization targets and are making an effort to reduce the GHG emissions in their business operations. The long-term targets need to be aligned with the goals of the Paris Agreement to be considered "credible and ambitious transitions," according to Hu.

"Climate change finance is about recognizing such efforts and directing the capital flows to companies with credible transition strategies and pathways," he said.

Paris Agreement: the goal

Regardless of whether companies have adopted a climate strategy with ambitious targets or whether recommendations have been made for a yet-to-be-adopted climate strategy, the goal is to meet the Paris Agreement, Hu said. While such broad targets can be relatively easily translated into goals and policies at the country level, at the corporate entity level there are ongoing discussions on what it means to be net zero or for a company to be Paris-aligned, and how these targets can be translated into concrete transition pathways with interim targets.

The Science-Based Targets initiative (SBTi) and Transition Pathway Initiative (TPI) have been providing guidance for company-level assessments. SBTi has guidance for nine sectors in different stages of development, and TPI covers 16 sectors and 73 companies. Relevant regulatory bodies have already provided targets for businesses in various sectors, according to Hu. For example, existing guidance helps companies in the telecommunications and aviation industries calculate their GHG emissions, and thus develop pathways aligned with the goals of the Paris Agreement.

If a company operates in a country whose national agreement in deployment contributions is aligned with the Paris Agreement, those targets could potentially be used as a benchmark. Unfortunately, no APAC countries have so far aligned with the 1.5 degrees Celsius Paris scenarios, according to non-profit studies, Hu said. Only two Asian countries - India and the Philippines - have announced GHG emissions reductions targets comparable with 2 C scenarios.

"So [it's] definitely a challenge for issuers to define credible targets. But there are already existing resources they can use as a benchmark to reference," Hu said.

Speaking from her company's perspective as an Asia Pacific renewable energy developer and green bond issuer, Junwon Chae, head of corporate and sustainable finance at Vena Energy in Singapore, shared the tasks the firm had to undertake in putting together a sustainable strategy and in ensuring it is on a credible transition pathway.

"Our core business is about facilitating [the] low-carbon transition. For us, what the green financing does is to provide a clear definition and compartmentalization of our various activities under the taxonomy of Green Bond Principles and Sustainability Linked Bond Principles such as renewable energy, energy efficiency, circular economy — so that it's transparent and easily digestible for the community and wider investing community," she said.

Stakeholders in the firm - which as of December 2019, the latest available data, had a portfolio comprising 55 operating assets with a gross capacity of 1.7 GW and 86 projects under development with a gross capacity of 9.0 GW - have asked it for information such as the specifications and definitions of project selection, how it manages and reports its proceeds, all of which helps the firm to ensure transparency and accountability, according to Chae.

Vena Energy engaged an external party to provide independent opinions on the firm's overall ESG practices. The feedback from those audits has encouraged the firm to look beyond its core business of renewable energy generation and installing incremental amounts of capacity, Chae said.

"It really looks at all parts of the business, [how we] practice [the] social aspects, how we engage [with] our employees, our whole community, how we build in a responsible manner, as long as our practices really ensure transparency which is critical in terms of earning the trust of our stakeholders," she said.

IFC Performance Standards on Environmental and Social Sustainability

In deciding the standards to follow when formulating its sustainability strategy, Vena Energy took guidance from the International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability.

"Given that the infrastructure and characteristics of our core activities, performance standard is most relevant because it covers a lot of material issues, issues that are material to our stakeholders at large, whether it is preservation of biodiversity, community, health and safety concerns. These are all aspects that are at the detailed level and are covered by the [IFC] performance standards," she said.

The need to meet the requirements of its banking partners was another reason Vena Energy adopted the IFC performance standards. Other requirements such as equitable accounting principles and a host of others including climate investments, climate risks, and human rights also aligned with the performance standards.

"… I think the performance standards feel like it is becoming increasingly more a requirement rather than us now adopting a particular standard voluntarily. There's been an incredible evolution probably in the past 10 years. And now more and more it's becoming a lot more important to be aligned with the performance standards and [become] more aligned with the interest of the wider stakeholders," Chae said.

Reporting by Soo Cheng Lee.