Co-author: Christopher Soh, Sustainability Consultant at KPMG
3 min read
How can financial institutions remain resilient against climate change and address rising Environmental, Social and Governance (ESG) expectations of their stakeholders? The latest IPCC report in 2021 highlights the urgency to do more, decarbonise and limit global temperature rise. COVID-19 has also put social issues firmly in the spotlight.
ESG as a topic is by no means new but the interests and developments in ESG and sustainable financing in the region are certainly unprecedented. To name a few, we are observing the following trends in recent years:
- Greater demand for ESG-related products and transparency from investors: By investing in such products and understanding their impacts, it helps them better manage and size ESG risks, whether financial or non-financial
- The role of the financial industry is changing: For example, the Asian green bond and sustainable bonds market is surging, signalling that green recovery is synonymous to post-pandemic recovery
- Active stewardship: In a nutshell, asset owners and investment managers are increasingly engaging with, and influencing investee companies on ESG issues
- Climate risk regulatory developments: The regulators have set their expectations for financial institutions in the way they manage climate risks – In Singapore for example, the Environmental Risk Management Guidelines introduced by the Monetary Authority of Singapore (MAS) in 2020, aims to enhance the financial industry’s resilience and management of environmental risk with a focus on climate change
While ESG is gaining traction, it is worthwhile remembering that ESG integration is a journey and not just a destination. Considering the creation of ‘green jobs’, channelling of capital into sustainable developments, divestment from unsustainable business activities, and environmental and human rights protection, the positive effects of ESG developments on Asia is evident.
However, the robustness of green financing or responsible investment framework will take time to develop in this part of the world while a green taxonomy is still being developed. For example, the EU Green Taxonomy will help to facilitate robust, transparent and consistent definition of a list of ‘green activities’ and scale up sustainable investment in the European market with a credible benchmark. In comparison, investors in Asian countries such as Singapore may find it difficult to meaningfully ascertain if an investment or economic activity is ESG-centric. On this note, it will take time and commitment to create a clear benchmark, consistent with global standards such as the EU Green Taxonomy.
In a bid to strengthen resiliency, there are immediate actions that both financial institutions and corporates can take and it is safe to say that they require strong commitment:
- Set a clear ESG vision for your organisation that articulates your approach to managing ESG risks and promoting ESG efforts.
- For asset owners and investment managers, set a clear ESG policy framework to guide responsible investing activities.
- Explore sizing financial impacts from climate-related risks linked to your portfolio and business through climate scenario analysis and stress-testing. Simultaneously, consider climate-related opportunities which may present new growth areas.
- Pursue decarbonisation or carbon reduction efforts, either within your portfolio or other aspects of your business, which will be critical if we want to limit global temperature rise.
- Consider setting science-based targets which will help your organisation to drive decarbonisation efforts and meet your climate ambition.
- Collaborate with other industries to integrate ESG into mainstream finance. This could be done through thought leadership, capacity building, and active engagement with other industries or regulators.
Managing ESG and climate-related risk is undoubtedly business critical. The financial industry has an important role to play in this through sustainable financing and careful consideration of ESG criteria in decision-making processes. Given that ESG is mainstream, we should expect to see more sustainable financing developments in the near term.