The
Paris Agreement aims to strengthen the global response to the threat of
climate change by keeping a global temperature rise below 2 degrees Celsius
above pre-industrial levels. In
order to reach the goal of Paris agreement, many countries have launched
initiatives that targets to lower carbon emission and transform into low carbon
economy.
Though heavy industries account for a substantial portion of
global greenhouse gas emissions. Financial institutions also play a very important role in
this transition as they are responsible for the financed emissions, either
through their lending or investments, which is also considered as scope 3
emission.
It is encouraging to see more financial institutions start
to evaluate their carbon footprints. By measuring the carbon exposures and
intensities of their investments or loan books, they are able to establish a
baseline. After knowing where their portfolios stand, they would set up
reduction targets or formulate their two degree policies.
While carbon footprinting is a fundamental step, the climate
analysis won’t be complete without incorporating forward looking data and
scenario analysis, as guided by Task Force on Climate-Related Financial
Disclosures (TCFD).
For example, one of the key transition risks is carbon pricing risk and it is strongly tied to the earnings of investments made. According to general consensus, the carbon price is expected to increase 7-10 folds to USD $120/ton by 2030, which represents a very significant increment from now. The increase in carbon price would impact companies’ current earnings and be priced in as the adjusted EBITA and reduction in EBITA margin. Financial institutions would then stress test the potential impacts by looking into different climate scenarios and tenors.
On the other hand, physical risk is also an imminent threat
to financial institutions. Their investments or collaterals for loans or even
mortgage books would be located in physical risk prone areas that would suffer
in great loss from the climate change. Different hazard indicators (i.e.
flooding, drought, wildfire etc.) can now be mapped to the asset locations to a
very granular spatial resolution, such the physical risk can be quantified on
either asset level or company level.
As climate risks translate into material financial risks,
financial institutions should not ignore the climate change, they should start
to measure and asses the climate risks of their portfolios.
Greener
cities are essential to a low carbon and climate resilient future.
By 2030, more than 550 million
people are expected to move to cities in Asia, where they will generate more
than 85% of GDP and bring the urban share of the population to roughly 44
percent. Cities are already responsible
for around 70 percent of global energy use and energy related greenhouse gas
emissions, which will increase as they grow.
For the new and emerging cities in
the region, there should still be the possibility to leapfrog historical
approaches to urbanisation and to prioritise the development of more resource
efficient, climate friendly cities – a whopping 75% of the area expected to be
urban by 2050 has not yet been built !
But for a mature city like Hong
Kong, it is largely a matter of improving upon what we already have in the
ground. In order to meet the goals of
the government’s Climate Action Plan 2030+ (including carbon emissions
reductions of at least 26%), significant change has to occur in three key
sectors: buildings, waste management and transportation.
Buildings
Over 60% of Hong Kong’s carbon emissions are attributable to
generating electricity for buildings.
While new buildings are already subject to a green standards regime in
Hong Kong, there is substantial potential for energy savings by upgrading and
retrofitting aging and inefficient building stock.
The bottleneck in building upgrade is not technology, but
financing. Building owners tend to be
reluctant to provide capital for improvements that will take several years to
pay back. However, very little
commercial funding is available, as most banks view energy efficiency projects
as disparate, onerous to analyse and too small sized to justify much attention.
Waste Management
In densely populated Hong Kong, waste is an increasingly
challenging issue. The territory
generates around 6.4 million tonnes of waste each year but is able to collect
and process only a minimal portion of recyclable waste. Approximately two thirds of Hong Kong’s waste
goes into landfills, whose existing capacity is expected to be full up this
year. Landfill waste is typically highly
toxic and can severely damage surrounding ecosystems.
New
capital is required to support innovative technologies to tackle waste
management, such as composting and recycling, and in particular waste to
energy. The Hong Kong government is
creating a long term plan for the development of waste to energy facilities,
but it not clear how this roll out will be funded.
Transportation
Carbon emissions from transportation make up about 16% of
the total emissions in Hong Kong. While
the rail and tram systems are run on electricity, road vehicles are mostly
powered by diesel, petrol and LPG. Air
quality in Hong Kong, especially roadside pollution, remains a significant
challenge.
For several years, the Hong Kong government provided some of
the most generous tax incentives in the world
for the adoption of electric vehicles, but faced
strong criticism for using public money to subsidise the purchase of high end
vehicles. The incentive was subsequently
withdrawn and electric vehicle purchase rates decreased rapidly.
Filling the Funding Gaps
One of the most effective ways of
altering public and business behaviour is by making change affordable. We only need to look around the world at
successful case studies from other cities where funding solutions have been put
in place to tackle specific urban climate issues.
To take just one example,
buildings. In New York, an energy
efficiency company called Sealed Inc introduced an innovative programme that
would carry out upgrades but also offer home owners an easy way to pay for them. Sealed advances the capital for the bulk of a
household’s efficiency upgrades and also takes over as the billing agent for
the home owner’s utility bills. The home
owner pays Sealed a monthly bill that covers both the household’s energy use
and the upgrade investment. This is a
much easier solution for the home owner than trying to get financing somewhere
else.
Or another example,
transportation. In Australia, the
government backed Clean Energy Finance Corporation provided financing of A$50
million to encourage vehicle fleet buyers to choose cleaner models. This funding allowed Eclipx Group, one of
Australia’s largest independent fleet leasing companies, to offer financing at
lower interest rates to customers who invested in passenger and light
commercial vehicles satisfying low emissions benchmarks. The loans were later packaged and sold in the
capital market.
There are many more case studies and
precedents on which Hong Kong could build to fill its own funding gaps. Regulation and education can only go so
far. Finance is an essential part of the
transition to a greener city.
Assets managed with environmental, social and governance principles are growing faster than the rest of the investing industry, according to a study of 500 large asset managers published last Monday by Willis Towers Watson.
Assets allocated to ESG principles rose by 17.8% in 2018, compared with the total industry where asset growth is declining at a rate of 3%, Willis Towers reported. Mandates for ESG investing grew even faster – rising 23.3% in 2018 as asset managers sought to specifically hire ESG-focused managers.
Client interest in sustainable investing was 83% up, according to a survey of the asset managers. “Sustainability has now become an unavoidable issue.” Bob Collie, head of research at Willis Towers’s nonprofit Thinking Ahead Institute said in a statement.
This is consistent with the trend in APAC region. According to the polling results of the inaugural Sustainable Investing Forum co-hosed by Thailand’s government pension fund (GPF) and Bloomberg last week, Asian investors are bullish on ESG investing and plan to ramp up sustainable investments in the next 12 months. 89% of 140+ investors, asset owners and asset managers from Thailand and the APAC region believe that ESG-integrated portfolios are likely to perform as well or better than non ESG-integrated portfolios and 51% said they will increase their sustainable investments in the next 12 months. The top two ESG bets in the next 12 months are in investments related to climate change (61%) and diversity & inclusion (23%).
