Asia’s central banks are getting serious on sustainability

What is the purpose of central banks? The obvious answer is to maintain domestic financial stability while contributing to the smooth functioning of the global economy. As the coronavirus outbreak and subsequent stock market rout and collapse in oil prices now highlights, central banks are critical players in efforts to ensure economic stability through monetary policy and market intervention.

But do central banks have a role to play in tackling climate change? For European Central Bank president Christine Lagarde, the future economic impact of global warming means the answer is a resounding yes. This may have led to accusations of ‘mission creep’, but for advocates, the economic threats of climate change – including to physical assets, the devaluation of certain asset classes through (necessary) policies such as carbon taxes and the expected increase in corporate liability and bankruptcy - all require central banks to respond.

And it isn’t just the ECB. Formed in 2017, the Central Banks and Supervisors Network for Greening the Financial System (NGFS) has grown rapidly, expanding from its eight founding members to include over 50 central banks. Its members sharing a common view that the risks to the global financial system posed by climate change must be addressed by central banks.

Critically, this isn’t only in Europe. An increasing number of Asia’s central banks are now looking to address climate change (the People’s Bank of China is a founding member of the NGFS). Across Asia, growing recognition by central banks of the need for action is now impacting energy investments. Sustainable finance is also rising in importance as central banks work to incorporate environmental, social and governance (ESG) criteria into policy frameworks and standards in lending.

Yet in doing so, most central banks face a major dilemma. In many Asian countries, supporting strong economic growth targets – or at least ensuring financial stability in the current environment – is the main role of central banks. But shifting policy focus to include mitigating climate risk and promoting sustainable finance requires a more balanced approach. Can these two goals ever be compatible?

China leading the way

Across Asia, central banks are working to develop climate policies and to apply a greater ESG filter to all lending, including energy projects. Unlike in Europe, however, Asia has no regional central bank to coordinate action. As such, responses vary significantly by country.

China is today a leader, not only in Asia but globally. The People’s Bank of China has been actively promoting the development of sustainable and low carbon financing for several years, including mandatory disclosures by domestic banks on ‘green’, ‘brown’ and ‘neutral’ lending.

Green finance was established as a policy goal for the financial services industry in the 13th five-year plan (2016–2020). Consequently, China is now one of the world’s largest green bond issuers. This is not restricted to domestic investment. Chinese banks now also offer ‘Green Belt and Road Bonds’. Of course, what gets defined as sustainable is questionable (is clean coal really ‘green’, or more a case of ‘greenwashing’?) but I expect to see more progress in the 14^th five-year plan, with energy financing a key focus area. 

Much work remains to be done

Progress made by the People’s Bank of China and other Asian central banks is encouraging but much more needs to be done. In a recent study, the South East Asian Central Banks Centre (the SEACEN Centre) surveyed central banks and monetary authorities across Asia on progress made to-date and looked at areas still requiring policy action. The results are quite stark, as the charts below illustrate.

The SEACEN Centre survey also showed that while almost all respondents believe that their institution should be involved in supporting low-carbon financing and green initiatives, only 22% had any strategic investment mandate to scale up private investment in low carbon sectors. No central bank in Asia has any plans to establish a green bank under its control. These are still early days.

Let’s not forget that central banks are charged with stimulating demand to drive growth – a task clearly taking on even greater importance as the global economy looks to stabilise and recover from the coronavirus outbreak. A focus on hitting firm GDP growth targets has too often led to a ‘growth at all costs’ ethos in many Asian economies. Returning to this post-coronavirus could contradict ambitions of tackling climate change if absolute growth takes precedence.

More broadly, even as Asia’s central banks increasingly talk up their efforts to promote green finance, this may not be producing the desired results. Despite the attention they receive, sustainable financing initiatives such as green bonds are still a niche business, and suffer from a lack of definition, disclosure and transparency. Globally, their impact remains highly debatable.

Asia’s central banks do have a role to play in addressing climate change risks

Energy companies should welcome initiatives by Asia’s central banks to tackle climate-related financial risk. A growing policy focus on green finance drives better investments by companies in Asia, benefiting both shareholders and the wider population. In addition, central bank action reduces the risk to companies here in Asia from rapid change elsewhere, such as the EU’s proposed Carbon Border Adjustment Mechanism.

There is now a risk that the current focus on central bank market intervention to fight the coronavirus outbreak side-lines this growing focus on sustainability. This would be regrettable. 

Globally, a huge amount of capital is available for green finance and Asian energy companies must look to attract this. Central banks have a major role to play in the allocation of this capital through developing sustainable capital markets and robust green finance policies. What is needed at this critical juncture are continued clear signals from banks (and politicians) that Asia is still embracing sustainability through innovation and change across its financial systems.  

APAC Energy Buzz is a blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.