Despite all the rage about sustainable finance, numerous obstacles remain for the green dream to come true including greater participation from Asia.
According to multiple environmental experts including Climate Action Tracker, the recent pledges from the COP26 Summit are expected to lead to a 1.8°C to 2.4°C increase in global temperatures, falling short of the 2015 Paris Agreement to limit warming to under 2°C and as close as possible to 1.5°C.
Elimination of coal usage is widely considered to be a key factor of success and the Paris Agreement stipulated the necessity to «phase out» the high carbon fuel by 2030.
But during the COP26 Summit earlier this month, only 40 countries submitted to the goal with a number of economies worldwide not only absent from that list of pledgers but even changing the language on their commitments from «phase out» to «phase down».
Asia Participation
The decision to adopt a path towards phasing down rather than phasing out coal usage is not limited to developing economies but also established ones like the U.S. or Australia.
Within Asia, the green dream is unlikely to be fulfilled without the participation of the two greatest engines of future growth – China and India – which were also amongst the pledgers to only phase down by 2030.
Even the promise of billions of dollars in green investments was not sufficient to attract the world’s two most populous countries which have opted to focus on near-term realism.
Banking Coal
Naturally, the financial sector’s activities mirror real economic activities rather than talk.
According to investigations by activist investor Market Forces, HSBC Global Asset Management has invested in coal companies that together are planning for 99 gigawatts of new coal plants which will emit 15 billion tonnes of carbon dioxide over their lifetimes – the equivalent of 32 years of U.K.’s annual emissions.
«Its new climate policy doesn’t affect these ownership stakes, allowing HSBC to continue being an owner of some of the most destructive companies on the planet,» said Market Forces on the British lender’s commitment for its business to achieve net-zero carbon emissions by 2050. «HSBC can say it will take action on climate change or it can profit from ownership stakes in coal companies. It can’t do both.»
Investor Reluctance
Governments and businesses in Asia are not the only entities that have shown relatively muted enthusiasm in pursuing an aggressive path towards sustainability with investors also demonstrating limited interest.
Just 25 percent of Asian investors (excluding Japan, Australia and New Zealand) have adopted ESG frameworks, according to MSCI’s «Investment Insights 2021» report released in January, representing less than half of the global average of 52 percent and one-third of leading nation Canada’s 75 percent.
Green Market Size
While investments into areas related to sustainable finance are surging at a breakneck pace, the absolute amount remains relatively insignificant compared to the full size of global markets.
According to Refinitiv data, green bond issuance in the first half of 2021 tripled to over $800 billion. This is equivalent to a little over 0.6 percent of the total bond market which has an estimated size of around $128 trillion as of August 2020, according to an analysis by the International Capital Market Association (ICMA).
Within equity markets, only 6 percent of large cap stocks are aligned to the climate change goal of limiting global temperature increase to 1.5°C, according to estimates using Lombard Odier’s proprietary temperature alignment methodology.
Asian Dependency
With Asia touted by most as the greatest source of future wealth creation and economic activity, the region is likely to make up a growing share of investments and capital markets.
This effectively means that the success of sustainability worldwide will be highly dependent on how governments, issuers and investors in the region think and shape financial markets.
Serious advocates will need to better entice Asian economies beyond political pressure and feel-good factors with real economic solutions for transitioning and better regulation to address issues such as reporting standards and greenwashing.
