The Intergovernmental Panel on Climate Change (IPCC) – a body mandated by the UN to provide scientific information relevant to understanding climate change – on Monday sounded a stark warning on warming temperatures across the globe, forecasting an increase of 1.5°C and 2°C during the 21st century.
That finding, published in its Sixth Assessment Report is at odds with the goal to limit global warming to “well below” 2°C compared with pre-industrial temperatures by the turn of the century, as was agreed to in the 2015 Paris Agreement. The report highlights the role and meteoric rise of sustainable finance as a critical part of climate change strategy.
The quest for greater sustainability is having wide ramifications on corporates and the financial services segment. The effects reach beyond project financing or capital markets activity, influencing economies and legislation and creating the need for a steady stream of climate change specialists in those spheres.
A “huge area for growth and one for which we have already seen a great deal of budget being outlined, is strategic hires for heads of ESG,” said Emma Donald, director, head of Greater China, Northeast Asia & Government Affairs at Andrews Partnership, an executive search firm focussed on corporate affairs, communications and investor relations.
“In five years, it’d be difficult to hire in senior Corporate Affairs roles without deep experience in sustainability and/or ESG (economic, social and governance aspects),” Donald said in a written response to questions by FinanceAsia.
The development of sustainability and its derivatives in Asia has lagged behind markets in the US and EU. In perhaps the biggest breakthrough in achieving a unified international code on sustainable economic activities, the EU introduced its climate change taxonomy this year.
A similar bloc-wide initiative involving an Asian collective is yet to become a reality. However, there has been a push by businesses, market regulators and governments in the region to foster a larger culture of sustainability in corporate and public practice.
In China, for example, the three major agencies for economic and financial markets – the China Securities Regulatory Commission, the National Reform and Development Commission and the People’s Bank of China jointly published the Green Bond Endorsed Project Catalogue (2021 Edition), which became effective from July.
The evolution of governance frameworks represents a key risk factor for capital market participants, according to Fitch Ratings.
“Governance issues remain the most prominent and dynamic ESG Relevance Scores (ESG.RS) across all of Fitch Ratings’ asset classes,” Fitch analysts wrote in a report titled ESG Credit Quarterly: 2Q 21.
“Over 2Q21 (April-June), 86% of all ESG.RS score changes were in Governance factors. This reflects how, increasingly, governance of social and environmental risks and contingency planning are seen as strategic concerns for businesses,” they said.
Corporates are endeavouring to inculcate ESG principles and understanding in client-facing roles and the specialist knowledge offered by ESG professionals remains of great value, said Donald.
Policy divergence
A comprehensive approach is needed when incorporating sustainability from the national level down to the micro-economy. The divergence in dependence on fossil fuels in different parts of Asia means that local considerations still shape policymaking.
When it took off, conversations around sustainability were mostly limited to strategies deployed by energy companies, and focussed on encouraging green projects.
“We talk about the energy transition and most people think about projects. But it touches so many areas of law,” Jini Lee, head of Asia and the global co-head of the finance, funds and restructuring division at Ashurst, told FA.
Lee explained that the legal relevance of sustainability goes beyond examining taxonomy and sustainable finance regulation. “You've got employment law issues, you've got disputes -- so many things touch law and that's why we think that (sustainability) will continue to be an important driver”.
Lee added that legal professionals need to be very conscious of climate-related risks and opportunities as the world continues to move towards trying to achieve carbon neutral targets.
The digitisation-sustainability equation
While the theme of sustainability will continue to be relevant for businesses in the long term, another major factor figuring into corporate strategy is digitisation, and these two major forces are interacting in interesting ways.
The list of corporate heavyweights that have publicly stated they will strive towards net zero emissions by 2050 keeps growing. These include Thai agri-business conglomerate CP Group and Facebook, which, in 2020, joined the group of large firms that have that have committed to pursue the sustainability agenda, a September 2020 release by the United Nations Framework Convention on Climate Change said.
“It is not just about the industries that you would typically think of as generating carbon emissions but also those who utilise energy. Such as the amount of electricity tech companies utilise,” said Joshua Cole, Ashurst's Asia head of corporate transaction.
“Carbon neutrality undertaking from tech companies -- it's a significant commitment for them and it's changing the way that they operate their businesses and that's leading to changes in the way that the infrastructure for such businesses is built and operated as well,” Cole said.
Sustainability: capital markets incentive
The shift towards making companies more sustainable is also manifesting itself in the form of capital markets activity. Existing energy generators are looking to refocus and transition their generation assets as they reorientate their businesses.
“You're finding there are different levels of interest in different types of generation assets: from the more traditional legacy type of assets, to investment in more of the lower carbon footprint type of assets, such as in wind and solar and the like,” Cole explained.
Traditional providers seeking to overhaul their models are making dispositions to investors that are interested in acquiring or operating more traditional legacy generation assets. At the same time, traditional energy manufacturers are scouring the market for opportunities to invest carbon neutral energy generation.
This, coupled with the restructurings, is feeding M&A, both on in terms of acquisitions and disposals, said Cole.
