Helping our APAC clients embed ESG in their financial instruments

“There’s a clear cultural shift towards ESG amongst Asian investors and issuers” was one of the key messages NatWest ESG specialists – Dr Arthur Krebbers, Head of Corporate Climate and ESG Capital Markets; and Tom Cascales, Climate and ESG Capital Markets – shared with participants during NatWest’s ESG webinar for APAC customers.

17 Oct 2022 . 4 min read

Hosted by James Applewhite, NatWest’s Head of Currencies Sales APAC (excluding Japan), the key learnings from the session included:

Climate change in Asia

Asia has a major opportunity to decarbonise: in 2019, Asia represented 56% of all global carbon emissions (China alone accounted for 29%). Between 2000-2019, carbon emissions in Asia rose to 127% of all global carbon emissions, while they dropped within the EU by 19% and in the US by 13%. However, there is some positive news: Asia accounts for almost half of the growth in global renewable power generation [Source: Carbon Global Project].
Many Asian countries are particularly vulnerable to climate change: due to climate change, China’s maize production yields are predicted to drop by 17% by 2030, while rice production in India is estimated to drop by 9% by 2050 [Source: IPCC AR6 Climate Change 2022: Impacts, Adaptation and Vulnerability].

Climate change and ESG are moving to the top of Asian investors’ agendas

The Asian ESG landscape is driven by a variety of stakeholders: spearheaded by Asian central banks and investor groups, climate change and ESG are fast becoming a top priority. Some examples: India’s Central Bank in 2021 committed to integrate climate-related and environmental risks into its financial stability monitoring. Meanwhile, vociferous Asian investor groups such as the Asian Investor Group on Climate Change or the Asia Transition Platform are urging governments across Asia to do more for the transition to net-zero and sustainability.
Asian investors are increasingly embracing ESG commitments: the number of Principles of Responsible Investing (PRI) signatories amongst Asian investors has risen by more than 100% since 2018, with 595 investment companies in Asia now following them. Furthermore, in Japan, ESG integration has become the most popular investment strategy. The rise in sustainable investing is also due to new regulation. One example: The Code of Conduct for ESG Evaluation and Data Providers by Japan’s Financial Services Agency in 2022. The results of NatWest’s APAC Investor ESG Survey 2022, in which 70 investors participated, underlines the trend of ESG entering the mainstream investment industry:

Chart 1: NatWest Markets APAC Investor ESG Survey 2022

Source: NatWest data - download pdf

The Asian market is seeing a rise in ESG KPI-linked innovation across financial instruments

A cultural shift towards ESG: with Asian investors campaigning for ESG considerations to be embedded in business practices, there’s a noticeable cultural shift amongst Asian companies: treasurers understand that, in order to be successful, they need to take ownership of their ESG agenda. This also includes embedding ESG key performance indicators (KPIs) into financial products – a move which is also motivated by government initiatives across Asian countries which promote the use of sustainable finance.
Similar to the global rise in sustainability-linked financial instruments (see chart below), Asian companies are formulating ESG-linked KPIs to drive forward their sustainability journey as well as access the sustainable finance market: Malaysian bank, CIMB, for example, entered an ESG-linked Interest Rate Swap, which is linked to two KPIs: 1) Percentile ranking for banks based on the S&P Global Corporate Sustainability Assessment, and 2) Reductions in Scope 1 and 2 greenhouse gas (“GHG”) emissions. Hong Kong property investment company, Hysan, agreed an ESG-linked cross-currency swap, with KPIs related to inclusion in the HK Seng Corporate Sustainability Benchmark and a reduction in purchased energy. Meanwhile, Chinese agricultural science and technology firm Syngenta’s Sustainability-linked term loan facility is the largest of its kind in the Asia Pacific loan market and has been the largest executed term loan facility in the Greater China loan market since the beginning of 2022.
So far, most of the KPIs in the Asian market for ESG financial products have been purely environmental KPIs, but with social factors such as socioeconomic advancement and diversity/equality/inclusion (DEI) already featuring prominently across multiple sectors (as the International Capital Market Association (ICMA) has found in a recent study), Asian companies’ KPIs will equally include the ‘S’ in ESG for their choice of financial ESG products.

Chart 2: Sustainability-linked instrument market review

Source: NatWest data - download pdf

Want to know more?

To learn more from our specialists on this topic, please follow this link to the recording of our webinar. Or please get in touch through James or your usual bank contact.

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