Sustainable finance has taken off dramatically in 2020, and regulators across Asia have stepped up efforts to promote the development of green finance for a sustainable future. Fund flows to ESG investments in Asia and globally increased sharply in 2020 compared to 2019. Sustainable finance bonds reached an all-time high of $ 544.3 billion in 2020 and assets under management reached an all-time high of $ 544.3 billion in 2020. ESG funds in Asia have reached more than $ 60 billion. at the end of December 2020, thus doubling that of 2019.
As we approach the second half of the year, we see encouraging trends for sustainable investing in Asia that point to the deepening of ESG programs in the region.
China takes the lead
Asia-Pacific transactions involving sustainable companies accounted for 33% of merger and acquisition (M&A) activity in 2020 in transaction value. Based on the number of deals, China took the lead in the world during this period, accounting for 20% of total sustainable trading activity globally, followed by the United States (9%), the ‘India and Italy (7%).
With sustainable investing becoming more and more common, China has become a pioneer in green finance. It represents one of the largest markets for green bonds and is home to a wide range of other innovative green finance and ESG products, such as green funds, insurance products, exchange-traded funds (ETFs) and asset-backed securities.
Along with China’s national effort to achieve carbon neutrality by 2060, regulators are also helping to accelerate the momentum for ESG monitoring and disclosure of companies in China, with Chinese regulators starting to detail mandatory disclosure requirements for listed companies on their environmental information. Chinese stock exchanges have also issued market guidelines for the disclosure of ESG information.
Evolving green taxonomies
Sustainable finance taxonomies play a pivotal role in helping investors better identify sustainable companies amid concerns about greenwashing and the lack of standardized ESG regulations and reporting.
China published its green taxonomy (the Green Bond Endorsed Project Catalog) in 2015, and its central bank announced in late March that it is cooperating with the European Union to promote greater convergence of green finance and investment taxonomies. in both markets. The goal is to implement a jointly recognized classification system for corporate environmental benchmarks by the end of 2021. In the region, other Asian countries are also joining the green taxonomy trend.
More specific definitions of sustainable finance are important and it would be ideal to harmonize these taxonomies and their underlying dataset requirements across the region. Although full harmonization is difficult, a clear mapping of the underlying data sets that are the building blocks of the taxonomy for compliance is achievable and should be a priority.
Green bonds go social
The range of green finance solutions available to investors has grown significantly in recent years, with products such as green ETFs, green private equity, green loans, as well as other listed and unlisted products. that are coming to the market. Asia would do well to maintain, innovate and deepen liquidity in local markets for new green financing instruments.
Besides green bonds, social bonds have also emerged as an alternative financing tool in Asia, useful in the fight against the pandemic by mitigating the socio-economic impact of the crisis. This is largely explained by an increase in capital raising by sovereigns, multilaterals and banks to support the relief and recovery efforts of Covid-19. The product enables issuers to raise funds for projects with positive social outcomes such as basic infrastructure, affordable housing, micro-finance, food security and access to essential services.
Filling the data gaps
Despite the encouraging growth in sustainable investing, the lack of standardized, transparent and comprehensive ESG data and benchmarks to guide investment decisions remains one of the main obstacles among investors. According to the latest report from the Future of Sustainable Data Alliance (FoSDA), more than eight in ten institutional investors around the world cite data as a barrier to effective valuation.
To help address this challenge, FoSDA announced the creation of a Data Council in February 2021 to act as an industrial and regulatory sounding board focused on building consensus on key ESG data issues and needs. for a sustainable future.
The Covid-19 crisis reinforced the focus on sustainable investing and underscored the urgent need to tackle ESG risks. Sustainable investing has made an irreversible leap into the mainstream, and there is growing awareness that strong ESG practices can help Asian companies unlock new opportunities and attract new sources of capital into an environment. post-pandemic.
With Asian markets poised to recover before the rest of the world, the region’s green finance market will continue to grow and develop in the years to come. To help the sustainable finance ecosystem in Asia thrive, greater clarity, collaboration and convergence among regulators, investors and other industry stakeholders is needed to address the underlying challenges and maintain this positive momentum at long term.
The author is Chief Industry & Government Affairs Officer of the London Stock Exchange Group and Chairman of the Future of Sustainable Data Alliance.