Asia-Pacific continues to see strong momentum behind the development of green finance ecosystems and the integration of financially material environmental, social and governance (ESG) issues into mainstream investment management despite the Covid-19 pandemic.
“Governments and regulators have undertaken a host of initiatives towards green finance in the past 12 months, focusing on disclosure and transparency, enhanced corporate and economic resilience, and the development of green finance hubs to help fund the required transition towards more sustainable business practices,” says Gabriel Wilson-Otto, head of stewardship Asia-Pacific for BNP Paribas Asset Management.
These initiatives include ESG reporting requirements for listed companies, developments towards establishing local or regional taxonomies, development of guidelines for ESG-linked risk management and green investment, support for reporting in line with the recommendations of the Taskforce on Climate-related Financial Disclosure, and the establishment or enhancement of taxonomies to classify sustainable investments and business activities.
“The pandemic has shown that where there is political will, there is a way,” notes Frédéric Janbon, chief executive officer of BNP Paribas Asset Management. “Every country must show equal determination to fight global warming. The world economy has been temporarily closed to save lives. The climate crisis requires a much less extreme but more sustainable response.”
A key component behind the momentum towards green finance in the region is client engagement, which was demonstrated in how the government of Indonesia, a key market in Asia-Pacific, interacted with BNP Paribas Asset Management, which acted as one of the country’s asset managers when issuing its green bonds.
Sovereign green bonds provide an opportunity for countries to link their fiscal budgets with the nationally determined contributions for greenhouse gas (GHG) emissions they have submitted to the Paris agreement. Sovereign green bonds grant investors a chance to engage with a key segment in debt markets as sovereign issuance represents more than 40% of global debt securities.
Indonesia, in the context of the Paris agreement, committed to an unconditional 29% reduction target against a business-as-usual scenario by 2030. In March 2018, the Republic of Indonesia issued the world’s first sovereign green sukuk to help finance their climate targets. This was followed in February 2019 by a second issuance.
The use of proceeds from the green bonds included renewable energy, clean transportation systems and management of natural resources, which increase CO2 sequestration amongst other uses.
However, it was not clear whether palm oil activities were excluded from the bond’s scope, which is important given that the majority of Indonesia’s GHG emissions are generated from land-use change linked to palm oil plantations.
“Our engagement with the Indonesian issuing team was centered on the eligibility criteria for new forests and plantations,” Wilson-Otto points out. “They assured us that no use of proceeds had been allocated to any forestry-related activity so far. We examined the impact and use of proceeds allocation reports for the 2018 sukuk green bond and, while all proceeds had been allocated to green activities and none related to forestry or plantations, the reports fell short of best practice. We expect an improvement in their future reporting about the environmental impact of the projects funded, and we will continue to closely monitor the use of proceeds.”