A coal-fired power plant in the Netherlands. With environmental risk analysis tools, financial institutions will be better able to “convince themselves to shift away from brown assets quickly, towards green assets”, said green finance expert Ma Jun. Image:
Governments, central banks and financial institutions each have a role to play in ensuring that massive stimulus packages rolled out to revive Covid 19-stricken economies are channeled into green projects, said finance and responsible investing experts.
Because the carbon and environmental footprint of many investments, especially infrastructure projects, will be locked in for the next few decades, it is important they are designed to be low-carbon from the start, said Dr Ma Jun, director of Tsinghua University’s research centre for green finance development in China.
In a keynote address at the recent United Nations Virtual Forum on Responsible Business and Human Rights, Ma noted that a significant amount of government spending is to stimulate consumption—dishing out coupons to consumers to spend on goods and services, for instance.
To ensure the money is spent on greener products such as electric vehicles and energy-efficient refrigerators and air-conditioners, central and local governments could draw up a list of goods and services to subsidise, he said at a session titled Ensuring a Sustainable Recovery: What Role for the Finance Sector?
Governments should also be transparent with how the stimulus packages are being spent, so that the public is able to monitor its actions, he said.
Regulators should lower the cost of funding green assets
Central banks and financial regulators, meanwhile, should enhance environmental and climate disclosure requirements, said Ma, who is also special advisor to the United Nations Environment Programme and former chief economist at the research bureau of China’s central bank, the People’s Bank of China.
“We increasingly feel that (environmental and climate) disclosure needs to become semi-mandatory or even mandatory, in order to…enhance the quality and comparability of the data,” he said.
Countries and regions are beginning to introduce such rules. Hong Kong announced last year that it would make environmental, social and governance (ESG) reporting mandatory from 2021 and, in China, regulators are expected to make it mandatory for all listed companies and bond issuers to disclose environmental information by the end of this year, Ma said.
Regulators should also incentivise sustainable finance by lowering the funding costs of green and low-carbon assets, and increasing the funding costs of brown and polluting assets.
Last September, French bank Natixis voluntarily introduced a mechanism to incorporate climate risk into its credit decision-making process. Called the Green Weighting Factor, the mechanism allocates capital to financing deals based on their climate impact. Deals assessed to have a negative environmental impact are required to be more profitable than green deals, and the bank plans to increase the proportion of its balance sheet dedicated to green lending, Bloomberg New Energy Finance reported.
Financial regulators should formulate similar rules, said Ma.
I believe that trend will increase because we’re seeing that a lot of coal projects are also risky from a financial perspective as well as from an environmental perspective.
Dr Helena Wright, vice-president of Asia Sustainable Finance at the World Wide Fund for Nature, on whether more Southeast Asian banks would pull out of coal
Fight temptation to weaken ESG safeguards
On their part, financial institutions such as banks can lobby for better green finance policies and adopt responsible banking principles such as UN Environment’s.
They must innovate to overcome barriers hampering the flow of funds to green projects—such as by introducing insurance that would enable companies to obtain low-cost financing for environmentally positive projects, he said.
Ma encouraged financial institutions to adopt environmental risk analysis, and said the Network for Greening the Financial System—a network of central banks—is coming up with two documents this year that will help them. One is a paper that will introduce existing tools and methods for firms such as banks, asset managers and insurers to quantify financial risks from environmental and climate exposure. With such tools, financial institutions will be better able to “convince themselves to shift away from brown assets quickly, towards green assets”, he said.
“We estimated in one case study, that loans to coal-fired power companies may turn into a very risky financial asset because its non-performing loan ratio or potential default rate could go up by 20 per cent by 2030.”
Other speakers at the session included Dr Helena Wright, vice-president of Asia Sustainable Finance at the World Wide Fund for Nature (WWF), and Luanne Sieh, Malaysian bank CIMB’s head of group sustainability.
Asked if more Southeast Asian banks, following in the footsteps of Singapore’s banks, would pull out of coal financing in the wake of the Covid-19 pandemic, Wright said: “I believe that trend will increase because we’re seeing that a lot of coal projects are also risky from a financial perspective as well as from an environmental perspective.”
Urging the sector to avoid the temptation to weaken ESG safeguards in favour of short-term gains, Wright said some banks have instead demonstrated leadership in green finance.
South Korea’s Kookmin bank recently raised US$500 million from a Covid-19 response sustainability bond, for instance. The bank said proceeds will be used to support small and medium companies affected by the pandemic, in accordance with its sustainable financing framework.
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