An Asian shade of green

HOMES and businesses in several Chinese provinces experienced blackouts last month from power rationing and cuts. Root causes of the power shortage include short-term demand and coal supply-side issues and - more importantly - a campaign-style effort to meet energy intensity reduction targets by year-end.

As power cuts took a toll on economic momentum, investors revised Chinese gross domestic product (GDP) forecasts, including Bank of Singapore (BOS). We trimmed our 2021 China GDP forecasts from 8.2 to 7.9 per cent, and 2022 growth from 6 to 5.5 per cent.

This is a prime example of China's delicate balancing act to fulfil the "triple bottom line" of people, planet and prosperity. Energy transition could inflict short-term pain, as nations pay the upfront cost to commit to longer-term climate goals.

China's ambitious targets for peak carbon emissions by 2030 and carbon neutrality by 2060 has global ramifications. China is aiming for 80 per cent of energy consumption from non-fossil fuels by 2060, in favour of renewable energy including solar, nuclear, wind and hydro sources.

Based on MSCI's analysis of a hypothetical portfolio of MSCI China constituents, 1,384 million tonnes of carbon dioxide equivalent (MtCO2e) of greenhouse-gas (GHG) emissions will need to be cut to meet 2030 targets. The biggest carbon emitters such as materials, utilities, energy and industrials, will bear the brunt of emissions reductions.

Beyond its shores, China's decarbonisation pledge could drastically reduce the financing of coal plants in the developing world. President Xi Jinping told the United Nations (UN) General Assembly last month that China would no longer build new coal power projects aboard and would step up support for other developing countries in developing green and low-carbon energy. This is in line with one of the key issues that leaders in advanced economies will discuss at next month's 26th UN Climate Change Conference of the Parties (COP26) - how to channel US$100 billion a year in climate finance to help poorer, developing countries cut emissions and adapt to climate change.

Beyond grandiose policy statements, multilateral action is essential to combat a climate crisis which ignores borders. As John Donne said: "No man is an island, entire of itself; every man is a piece of the continent a part of the main."

Asia requires an inter-disciplinary approach in balancing climate goals with post-pandemic economic recovery in populous nations, which rely on carbon-intensive practices in agriculture, transport and industrial activity. Fiscal tools such as carbon taxes and financial incentives can prompt industries, companies, and individuals to change behaviours. Financing and investment capital can be deployed as a powerful force for climate change and social inclusion.

While Asian countries and companies may lag European peers in climate change initiatives, the region represents a unique opportunity to generate positive climate impact and fulfil sustainable investment objectives. Investor engagement and alignment with international standards across environmental, social and governance (ESG) metrics such as climate risk, energy efficiency, natural capital, pollution and waste are potential opportunities for turning industry laggards into leaders.

Asia as a carbon sink

Asia is the epicentre for two existential sustainability threats: biodiversity loss and climate change. While China, India, Japan, South Korea and Indonesia are among the world's largest GHG emitters, they also offer the greatest potential for greener outcomes.

Indonesia's tropical forests and peatlands sustain 17 per cent of the world's wildlife species. They also store 300 billion tonnes of carbon. Herein lies the conundrum: 74 per cent of the poor in Indonesia rely on this same ecosystem for basic livelihood. Hence, conversion of this treasure trove into agriculture land has made Indonesia one of the highest contributors to global emissions.

This calls for an intentional approach by government, non-profit organisations and investors to balance the scales between environmental and social priorities.

Asia's CCUS opportunity

Carbon sequestration is the process of capturing and storing atmospheric carbon dioxide to combat climate change. Carbon capture, utilisation and storage (CCUS) technologies will be instrumental in supporting clean energy transitions for South-east Asia's power and industrial assets, while supporting the production of low-carbon hydrogen and ammonia, said the International Energy Agency (IEA).

Indonesia has established CCUS-related research programmes such as the Institut Teknologi Bandung Centre of Excellence for CCU and CCS, while Singapore's Low-Carbon Energy Research Funding Initiative will support research, development and demonstration projects in emerging low-carbon energy technologies. The voluntary carbon markets also allow carbon emitters to offset emissions by purchasing carbon credits from projects that target GHG removal or reduction. The Taskforce on Scaling Voluntary Carbon Markets estimates that the market for carbon credits could be worth over US$50 billion by 2030.

Emerging technologies

Heavy investments are needed to reshape entire industries across power generation, manufacturing, transport and agriculture to ensure that global emissions peak by around 2030. Areas of focus include electricity generation and advanced clean technologies, such as development of "green hydrogen" as a low-carbon energy source to decarbonise power generation and transport.

China, Japan and South Korea are at the forefront of electrification and development of battery technology to address the decarbonisation challenge in the transportation sector. China expects 20 per cent of new cars sold domestically to be completely electrified by 2035.

Rise of the Asian ESG investor

ESG investors around the world are confronted with an alphabet soup of investment standards for fund classification to combat greenwashing. In Asia, the Monetary Authority of Singapore (MAS) announced environmental risk management guidelines in December 2020, while the Hong Kong Monetary Authority and Securities and Futures Commission recently announced findings from consultation papers.

Asia could benefit from interoperable ESG definitions and consistent taxonomy and standards. Just as mobile communications gained ubiquity from standardised protocols, sustainable investing will benefit from unified taxonomies for investors who invest pan-Asia.

Another key challenge is the availability of standardised data sources in Asia, as ESG ratings agencies rely on company disclosures and non-standard third-party sources, including government and non-governmental organisations.

Globally, fund managers may apply exclusion criteria to limit exposure to companies with thermal coal-related exposure, controversial weapons, corporate governance breaches and other norms-based criteria including environmental standards.

In Asia, outright exclusion of selected carbon-intensive industries could result in a missed opportunity to engage and influence investee companies to progress towards sustainable practices. Instead, applying tolerance thresholds and enhancing monitoring could allow both investors and investee companies to achieve transition within an acceptable timeframe. This transition approach can provide much-needed capital for companies to adjust their business models, invest in viable technologies and implement processes to become sustainable businesses within respective industries.

In a recent BOS survey among next-generation clients, 65 per cent of respondents indicated ESG goals within their investment criteria, while 45 per cent saw ESG goals as equally or more important than financial returns. How can these views be translated into action? Along the continuum of responsible, sustainable to impact investing, will investors need to sacrifice returns to fulfil their ESG objectives?

As we refine success metrics for sustainable investing, investors will recognise that it is not a zero-sum game. Transparency about climate goals and carbon intensity including short-, medium- and long-term milestones could be more meaningful measures of investment success for ESG investors than current performance yardsticks.

What can ESG investors do?

• Seek diversified exposure to potential beneficiaries of decarbonisation globally, amid the fast-evolving but uneven roll-out of supporting regulations globally.
• Adopt a broad-based approach to structure multi-asset portfolios of equities, bonds and funds with ESG considerations; Or, take a targeted thematic approach to invest in sustainable or impact funds with clear goals based on selected UN Sustainable Development Goals that matter to you.
• Examine and risk-manage investment portfolios using "green-tinted" lenses. Does your portfolio contain investee companies with open climate risks and no clear transition plan? Will they be caught out by upcoming sustainability-related regulations and be left with stranded assets? Does your portfolio contain investee companies which can deliver sustainable returns that are climate-resilient in the face of material climate risks and regulatory changes?
• Allocate capital responsibly: Individual investors can exercise their voice by deploying capital in a responsible manner. The collective force of individual investments can complement the efforts of large asset owners and institutional investors to propel the low-carbon transition by Asian companies and industries.
• The writer is chief investment officer and head of portfolio management and research office, Bank of Singapore.