_2.jpg)
Transition finance is rapidly gaining traction in Asia as the region balances economic growth with decarbonization against the backdrop of highly dynamic macroeconomic and geopolitical forces.
The financial sector and corporates are exploring transition financing opportunities with an increasing focus on sector-specific transition pathways, supported by new frameworks and innovative financial instruments.
In an interview with The Asset, Diana Parusheva-Lowery, managing director and head of public policy and sustainable finance at the Asia Securities Industry and Financial Markets Association (ASIFMA), says: “Against this background, pledges are continuing, new climate financing trends are emerging and regulators are adopting a firmer stance towards scaling up and streamlining investments.”
Parusheva-Lowery cites three major trends driving the agenda for transition finance: the growing shift from green financing to transition financing, how markets are dealing with the extra-territorial impact of different regulations from different countries, and the urgent need for global standard setting bodies to arrive at a common understanding when setting new standards.
Although green finance and transition finance are both essential concepts of sustainability, they serve different purposes and focus on different stages of environmental impact. And, while there are still issues when it comes to exact definitions, there is a consensus that green finance is focused on funding activities that are already green, or directly tied to environmental sustainability from the start, while transition finance supports industries and companies that are moving from brown to green, or from high- to lower-carbon operations.
In the past few years, a lot of geopolitical forces, Parusheva-Lowery acknowledges, have adversely impacted green and transition financing, and sustainability financing, in general.
“Unfortunately, this agenda has been taken over by political winds,” she notes. “What will happen in the US, as we all know, is very important, because the two candidates have different understandings on the importance of climate change and of the important role of the US in this internationally.
“Also, we see in Europe, a new parliament and new kind of commission are in the making; and we’ve started seeing hints that Europe will slow down, perhaps a little bit, in their efforts to push new regulations.
“We’re also seeing elections in Asia – India, Indonesia, Vietnam and Korea – where, every government will have slightly different priorities. Ultimately, we have now reached the realization that this climate agenda comes at economic cost or opportunity. So, people will have to face reality.”
In terms of the extra-territorial impact of regulations, the EU is expected to slow down with the issuance of new regulations, and perhaps tone down the speed of implementation of some existing regulations.
However, the extra-territorial impact of some regulations, particularly the EU’s carbon border adjustment mechanism (CBAM), is already being felt in Asia.
The CBAM aims to prevent carbon leakage by placing a price on carbon-intensive imports, including goods like steel, cement, aluminium and fertilizers. But for Asian exporters and EU importers, there are pricing disagreements under the CBAM due to different carbon pricing systems, emission reduction targets and regulatory frameworks in their respective regions.
For example, the forecast project prices in 2024 for carbon allowances, also known as EU Allowances or EUAs (a type of carbon allowance that allows companies covered by the EU emissions trading system to emit a certain amount of carbon dioxide), was set at an average of €89.90 (US$97) per tonne.
This is much higher than the carbon prices in Asia, which vary by market from €7 to €10 per tonne in China to €15 to €25 per tonne in South Korea and €17 in Singapore. These prices are based on various factors, including the maturity of the carbon market, carbon pricing mechanisms, regulations and the policies of each market.
“A lot of countries in Asia that are heavy exporters to Europe are now putting in place their internal carbon markets, and trying to bring in mechanisms to justify that their industries are paying a fair carbon price, in order to avoid some of the consequences and respond to the CBAM,” Parusheva-Lowery points out. “This also has political dimensions. Because for certain countries and economic sectors, the CBAM is going to be a heavy burden.”
When it comes to global standard setting for transition finance, there is some light at the end of the tunnel with the International Organization of Securities Commissions having formed working groups for transition financing.
“This working group will look at how the interaction between different transitions in different economies will work,” Parusheva-Lowery shares. “The Hong Kong and Singapore monetary authorities have both issued guidance on transition planning. So, these are some of the examples of how the global standard setters are starting to pull their weight and guide the market.”
“We have a very good sense of how the financial market in Asia feels about this agenda, and it’s at the top of everybody’s agenda, I have to say, alongside that of digital innovation, which is the other ground-breaking field,” Parusheva-Lowery states. “Sustainability is really the one thing that will distinguish one entity from another.”
ASIFMA, which currently has 170 member firms – among them, the big American and European banks and asset managers, Singaporean banks, a few Indian banks, all the major Japanese banks and six Chinese banks – is holding its 5th Annual Sustainable Finance Conference on October 30 at the Renaissance Harbourview in Hong Kong.
