By Strauss Cooperstein
ESG related bonds and syndicate loans in the sustainable finance market will surpass $1 trillion in value by the end of Q2 2020. While the Asia-Pacific region accounts for only 2.4% of these funds, sustainable fund assets have grown about 40% for the past fiscal year to reach $8.5 billion. ESG stands for Environment, Social, and Governance – a rating system developed to test borrower’s sustainability commitments. As the market is projected to skyrocket to $2 trillion by 2022, European banks are aggressively increasing their share of environment-focused project loans in high-emission regions of Asia where developing renewable energy infrastructure seeks to mitigate climate change concerns.
Europe’s lead on ESG financing is in part due to tightening EU regulations on zero carbon emissions. Further, Europe’s low-interest environment, partially stemming from the European Central Bank’s 2014 negative interest rate policy, has pushed banks to find new ways to increase profits on a medium and long-term basis. While it has been traditionally hard to aggregate ESG information in a region with such diversity in economic and social development, 13 out of 14 of Asia’s main exchanges are now members of the Sustainable Stock Exchange Initiative, prompting mandatory disclosures and easier access for foreign banks to understand companies’ long term sustainable investment priorities. Similar to its peer regulatory bodies in East Asia that adopt investor stewardship codes, the China Securities Regulatory Commission now actively promotes the ESG loans through international exchanges. Thus, banks like HSBC, Credit Agricole, and Deutsche Bank, among others, have focused on in-house employee ESG education and are pushing demand for companies to issue environmental bonds or securities. According to Refinitiv, the issuance of these bonds and loans as of September 9th has totaled 80% of last year’s amount at $365.3 billion with a decent proportion coming from European banks. For example, HSBC pledged $100 billion in financing for climate change programs by 2025 and already raised $52.4 billion of that by the end of 2019.
Standard Chartered, a UK bank that has pledged $75 billion to sustainable development goals, has been rolling back financing for companies with unsustainable priorities in Asia Pacific. The bank’s portfolio of loans dependent on risky diamond mining debt caused financial losses of $400 million dollars and also indirectly supports deforestation and soil erosion. Additionally, Standard Chartered stopped advising Indian conglomerate Adani on its Australian multi-billion dollar mine after already deploying $12 billion in capital. Bold reversals like these have prompted peer European banks to follow. With an intended Asia focus, Spain’s Banco Santander announced a ten year plan to raise $238 billion in green finance by 2030, CaixaBank declared it was rolling out 150,000 biodegradable cards each year, and Italian group Intesa Sanpaolo clarified its focus on financing business models that emphasize waste removal and raw material reductions.
As China and the US continue to enter an intense phase of geopolitical and trade bifurcation, Japan and Southeast Asia are specifically becoming competitive for investment dollars in green energy technology. Thus, several European banks have considered setting up their Asia Pacific regional headquarters in those areas to capitalize on ESG potential.