Transition finance was shunned by financiers, particularly these in Europe, who’ve made internet zero pledges. However the tide is slowly turning.
“During the last 12 months or so, there was a change in sentiment in direction of transition finance,” stated Eric Lim, chief sustainability officer of Southeast Asia’s third-largest financial institution UOB, referring to the rising asset class which, in contrast to inexperienced finance, is used to assist brown sectors turn out to be greener over time.
“We had a actuality verify, significantly in Europe, that inexperienced shouldn’t be sufficient. You want to have the ability to chart out high-quality transition plans from carbon-intensive financial fashions to internet zero fashions.”
Lim noticed that institutional buyers in Europe who have interaction with the Singapore-based lender have turn out to be more and more open to transition-type monetary property within the type of bonds, loans, and equity-related monetary devices. However the important thing factor to notice, Lim stated, is these transition property must be of “high-quality.”
That is prompting Asia’s regulators to develop “extra assured in main the cost on transition plans and transition finance,” stated Lim.
He cited the Financial Authority of Singapore (MAS)’s work on managed coal phase-out with the worldwide local weather finance coalition Glasgow Monetary Alliance for Internet Zero (GFANZ) as progress, in addition to the latest launch of the MAS’s transition planning pointers for monetary establishments – which consultants have lauded as one of the crucial complete for the sector to this point.
UOB, following within the footsteps of its regional competitor DBS, printed its Transition Finance Framework final September, to help its purchasers in hard-to-abate sectors to pivot away from fossil fuels and different carbon-intensive enterprise operations.
The framework allows UOB to finance carbon seize, utilisation and storage (CCUS) applied sciences, carbon offsets and the adoption of low-carbon fuels for the transportation and logistics trade.
As of the top of September 2023, UOB has supplied S$38 billion (US$28.6 billion) in sustainable financing, surpassing its S$30 billion (US$22.5 billion) goal roughly two years forward of schedule.
Regardless of the rising curiosity in transition finance tasks globally, Lim famous that many nonetheless fail to satisfy the “double standards” of “high-quality” and “bankability” or business viability, which he added is the place corporations want better nationwide, sectoral and regulatory readability on credible transition pathways.
Even when an organization may articulate an funding plan to generate inexperienced or transition property, it could be “taking pictures [itself] within the foot from a business standpoint” if coherent sectoral and nationwide steering don’t exist, based on Lim.
Eco-Enterprise sat down with Lim to talk extra about how the financial institution strikes a cautious steadiness between potential short-term will increase in financed emissions whereas financing transition actions, in addition to the regulatory alerts wanted to provide monetary establishments the arrogance to scale up transition finance in Asia.
What are some key developments you’re seeing out there, and what are their implications for transition finance in Asia?
Whereas we see a rising consciousness inside the actual economic system of the necessity to transition, corporations are nonetheless struggling to confidently put collectively high-quality transition plans. It’s not a willingness difficulty, however extra about guaranteeing these plans are high-quality and executable. There’s nonetheless an absence of sectoral and regulatory readability on what nationwide pathways appear like.
If an organization shouldn’t be getting robust regulatory alerts from the federal government, it makes it a lot tougher for them to articulate a transition pathway with out ending up with stranded inexperienced or transition property [which are assets that may lose value or become obsolete as the world transitions to a more sustainable economy]. Suppose their funding plan generates new low-carbon economic system property, however the sectoral or nationwide ecosystem isn’t able to maximise the business worth of these property. In that case, they could be taking pictures themselves within the foot from a business standpoint.
For instance, practitioners discuss concerning the vitality transition pathway in three massive chunks: the vitality provide, or methods to wind down fossil fuels and develop renewable, hydrogen or presumably even nuclear capability; the transmission distribution and storage bit in between; and the vitality demand administration on the downstream aspect.
Many vitality transition plans focus on the provision aspect, however not sufficient consideration is paid to the transmission distribution and storage, and demand administration aspect. Because of this, actual economic system corporations would possibly put loads of capital expenditure into creating the provision after which realise there’s not sufficient demand downstream as a result of incentives are nonetheless in place to subsidise fossil fuels, or the infrastructure isn’t in place to make sure that the provision reaches the top person in an economically viable approach. That complexity makes loads of actual economic system purchasers dangle again out of concern.
Are actual economic system corporations held again by the worry of shifting too quick, forward of what the state’s route is?
That’s proper. This is the reason we advocate for every ecosystem participant to grasp the “levers” that sit inside their management. For a nationwide authorities or a regulator, it’s serving to them perceive that the actual economic system needs to maneuver, however they should make sure coverage adjustments.
A traditional instance in level: the Financial institution of Thailand has instructed Thai integrated banks that by the top of 2024, they should have at the very least one sector with a internet zero goal. Now, that is the primary time a banking regulator inside the area has instructed their banks that they want internet zero targets. We will inform you the second you begin to set internet zero targets, it essentially adjustments the material of how banks assume about enterprise.
As soon as public commitments have been made to regulators, buyers and the overall market, product capabilities have to be introduced to the desk, bankers must be educated, and the financial institution has to make sure its danger administration is as much as snuff. It essentially begins to vary how banks have interaction with the actual economic system. It makes the enterprise of internet zero the enterprise of banking.
What are the “levers” that you would be able to pull as a financial institution?
The MAS transition planning pointers are necessary as a result of the structural levers are those that create the biggest change.
The primary necessary structural change is that the regulator basically stands in entrance of the banking system to encourage banks to transfer in direction of internet zero, whereas steering them away from portfolio managing their solution to internet zero. In order a financial institution, we’ve got to maneuver in direction of internet zero however we are able to’t merely divest my approach in direction of internet zero. So being caught between a rock and a tough place means a financial institution has to interact.
What the MAS has finished is structurally assist the whole Singapore banking trade to legitimise our conversations with the actual economic system on a degree taking part in subject, and to push for transition plans, roadmaps and funding plans in direction of a low-carbon economic system. This can be a large structural shift as there’s no extra arbitrage. So you’ll doubtless have the identical dialog if you go to any financial institution.
Secondly, there are better regulatory expectations on the banks to put money into their capabilities. After pointers are applied and regulators ask for an inspection, they would possibly request for a financial institution’s credit score acceptance pointers to be improved or deem purchasers’ transition plans to be low-quality.
Regulators are recommending better involvement in financing transition actions, which can enhance financed emissions within the brief time period. How is UOB navigating this?
Our board requested us the identical query. That is the place, once more, the transition planning pointers from the MAS turn out to be essential. It units the ambition, nevertheless it additionally units the expectation that banks ought to assist purchasers transition.
Say we’ve got a consumer that has a powerful, credible transition roadmap and funding plan, however their baseline emissions proper now are larger. After we do enhance our publicity to them we make it very clear to senior administration how we’ll assist them.
We maintain ourselves accountable to the board and to our regulator to carry out emissions attribution evaluation [used by investors to understand how much of an investee’s greenhouse gas emissions are attributed to an investment] at that degree. Then we’ll clarify to the market the explanations behind our actions.
What’s the distinction between high-quality and bankability? And what’s thought of a high-quality transition plan?
After we say “high-quality” credible transition pathways, we’re referring to trajectories aligned with the Paris Settlement, or limiting temperature rise to 1.5°C in comparison with pre-industrial instances and reaching internet zero carbon emissions by 2050.
In fact, completely different nations may need completely different internet zero targets, similar to Indonesia, which goals to be internet zero by 2060 as a part of its nationwide plan. If you’re an Indonesian firm with a transition plan working in direction of internet zero by 2060, it’s nonetheless thought of credible since it’s aligned with the nation’s nationwide ambition, regardless of it being completely different from Paris Settlement targets.
The second part of a high-quality transition plan is the power to articulate how corporations can change their enterprise mannequin to ship on that plan. As an example, they want to have the ability to say, “Right this moment, my enterprise mannequin has this a lot in oil and fuel. However by 2030, I need to have 15 per cent of my enterprise in renewables and 15 per cent of my analysis and improvement in hydrogen. In the meantime, I’m going to be utilising carbon seize know-how.” They should provide you with a enterprise transformation plan that has numbers behind it.
In critiquing bankability, each banks and buyers have a look at a firm’s plan and resolve whether or not their investments are commercially and financially viable. It’s our function as a financial institution to underwrite credit score, or assess the creditworthiness of debtors.
If the numbers don’t add up, then we deem their capital plans as not financeable or bankable.
You talked about carbon seize. Is there a white listing of decarbonisation applied sciences that UOB views as credible in its transition plans?
We recognise the truth that fossil fuels nonetheless must be part of the bottom vitality load for a while within the transition in direction of internet zero. CCUS needs to be responsibly used to seize, sequester or utilise carbon, however solely in the meanwhile.
We can not help CCUS whether it is used as an excuse to delay mitigation and a transition to renewable sources of vitality. So if somebody involves us and says they’ll depend on CCUS know-how whereas sustaining a coal-fired energy plant for one more 10 years, we’ll advise towards this.
Who’re the primary purchasers utilizing UOB’s transition finance framework?
The truth is that the majority purchasers would fairly go for a sustainability-linked mortgage (SLL) [a type of loan that is structured such that the interest rates borrowers pay are based on their achievement of sustainability performance targets] even when they’ve a high-quality transition plan in place.
It’s because there are nonetheless sustainability efficiency targets that permit them to entry sustainable financing however in a approach that protects their repute. As a result of scepticism that also surrounds transition property and transition finance, corporations are very reluctant to publish transition plans, believing that they’ll rapidly be criticised.
So once we discuss to them about publishing their transition plans, there’s nonetheless some reluctance to take action. They might fairly use SLLs and we have to change that; we have to legitimise the idea of transition roadmaps, pathways and finance to hurry up progress.
Have you ever witnessed the same transformation within the monetary system beforehand that might function a mannequin for making sustainable finance the norm?
In 10 years, sustainable finance shall be typical finance. Non-sustainable property, corporations, and enterprise fashions shall be seen as “non-conventional,” entice much less capital, and include larger financing prices.
Transition finance will ultimately legitimately turn out to be a part of sustainable finance, and the second we are able to unlock high-quality transition finance, it is going to throw into sharp distinction corporations that do not need a transition plan.
It’s because a transition plan is a enterprise technique and business viability plan for a low-carbon future. Corporations with out such a plan might quickly seem commercially uncompetitive to banks, shareholders and buyers in comparison with their opponents.
The European Banking Authority (EBA) additionally not too long ago introduced necessities for banks to start out incorporating ESG issues into their risk-weighted asset calculations. In a financial institution, we name that regulatory capital, which is the blood that flows by our veins. The second the central financial institution requires banks to contemplate sustainability when calculating the quantity of capital they have to maintain to replicate the danger profile of their property, it fully adjustments how banks make investments.
It’s early days, however this stuff manifest over time. As soon as we’ve got the precise applied sciences, ecosystems and frameworks in place for corporations to leverage, we’ll see sustainable finance changing into a norm a lot faster.
