Introduction to the special issue: Scaling Up Green Finance in Asia

The latest Intergovernmental Panel on Climate Change report notes the importance of mobilising green finance in order to limit global warming to 1.5°C and prevent catastrophic climate change. Fully implementing the Paris Agreement to meet this climate target will require US$ 1.5 trillion in green financing annually through 2030, according to the United Nations Framework Convention on Climate Change. At the same time, raising green finance is key to meeting Asia’s surging energy demand, which is fuelled by economic growth, population growth, and enhanced energy access. Two-thirds of global energy-demand growth will occur in the Developing Asia by 2040. Therefore, scaling up green finance in Asia is needed.

A major shift in investment patterns will be needed to ignite green finance in the region, and creating this shift is a growing focus of regional government policies. The number of countries promoting green finance in Asia is growing and new measures supporting green finance are being implemented in Asia. Learning from these recent experiences should help to design effective policies to further promote green finance in Asia.

There are several concepts related to green finance, sustainable finance, climate finance and low carbon finance. All these concepts ‘refer to the use given to financial resources’ (UNEP and the World Bank Group (2017, 83). Green finance is a narrower concept than sustainable finance, but broader than climate and low carbon finance (Figure 1). Sustainable finance can be used to finance projects with environmental, social, economic benefits; as well as benefits to other SDGs. Green finance can be used to finance projects only with environmental benefits, which include climate change mitigation, climate change adaptation and other environmental benefits. Although there is no unified definition of ‘green projects’, the following projects are usually considered as ‘green’ projects (ICMA 2018): renewable energy; energy efficiency; pollution prevention and control; environmentally sustainable management of living natural resources and land use; terrestrial and aquatic biodiversity conservation; clean transportation; sustainable water and wastewater management; climate change adaptation; eco-efficient and/or circular economy adapted products, production technologies and processes; and green buildings.

Figure 1. Elements of sustainable finance. Source: UNEP and the World Bank Group (2017, 85).

Global investment in renewables and energy efficiency has declined in 2018 and the growth rate has slowed down since 2015 (Figure 2). Investments in fossil fuel still dominate energy investments (Azhgaliyeva, Kapsalyamova, and Low 2019). Although the costs of solar and wind energy have declined sharply, fossil fuels still dominate energy investment in Asia. These investment trends could threaten the expansion of green energy that is needed to provide energy security and meet climate and clean air goals. Globally, investments in renewable energy, excluding large hydropower, are dominated by solar and wind (Figure 3). Investments in solar and wind power in Asia are nearly half of the global investments (Figure 4). However, this is mostly due to investments in China, India, Japan and South Korea (Figure 5). In non-OECD Asia (excluding China and India), investments in renewable energy (excluding large hydro) capacity are a lot smaller.

Figure 2. Global investments in renewable energy. Source: Own elaboration using data from UN environment, Frankfurt School-UNEP Centre, BloombergNEF (2019).

Figure 3. Global investment in solar and wind energy. Source: Own elaboration using data from Bloomberg terminal.

Figure 4. Investments in solar and wind energy by region, billion US$. Source: Own elaboration using data from Bloomberg terminal.

Figure 5. New solar Installations in Asia (descending order). Source: Own elaboration using data from Bloomberg terminal.

One of the fast-growing green financial instruments, green bonds, continue to grow fast from USD 3.4 billion in 2012 to USD 235 billion in 2019 (Azhgaliyeva and Kapoor 2020). In 2019 issuance of green bonds grew by half (Figure 6). China for several years remains the major issuer of green bonds not only in Asia, but also in the World. Other major issuers in Asia are Japan (Figure 7); South Korea; India; and Hong-Kong, China (in descending order). Although South-East Asia is the third-largest market in the world (after China and India), only 1.5% of global green bonds are listed in South-East Asia since 2017 (Azhgaliyeva and Kapoor 2020). Although green bonds proceeds can be used to finance mitigation and adaptation of projects with clear environmental benefits (ICMA 2018), green bonds proceeds have been used mostly to finance renewable energy and energy efficiency projects.

Figure 6. Global issuance of green bonds. Source: Own elaboration using data from Bloomberg terminal.

Figure 7. Issuance of green bonds by top 10 issuing countries. Source: Own elaboration using data from Bloomberg terminal.

Given the aforementioned conditions, in order to achieve the Sustainable Development Goals and avoid the worst climate change outcomes, we need to scale up the financing of investments that provide environmental benefits through new financial instruments and new policies, such as green bonds, green banks, carbon market instruments, fiscal policy, green central banking, ‘fintech,’ community-based green funds, etc., collectively known as ‘green finance' (Sachs et al. 2019).

Thus, this Special Issue collects seven papers that aim to address some of the above issues. Several papers included in this special issue were presented at the Asian Development Bank Institute (ADBI) Workshop on Green Infrastructure and Finance Development in Asia: Investment, Policies and Economic Impacts that was held on 14–15 November 2019 at the ADBI office in Tokyo, Japan.

The papers published in the Special Issue use a variety of methods, including surveys, qualitative reviews, and simulation and empirical methods. In addition, the papers represent/bridge several disciplines, including law, politics, economics, and finance; and provide policy recommendations for promoting green finance in Asia. Papers provide broad geographic coverage of Asia: two papers have a regional focus – one on South-East Asia and one on Asia-Pacific; and four papers focus on particular countries–Indonesia, Peoples’ Republic of China (PRC), India, and Japan.

The paper The role of central banks in scaling up sustainable finance – what do monetary authorities in the Asia-Pacific region think? (Durrani, Rosmin, and Volz 2020) investigates the role of central banks and other monetary authorities in promoting sustainable finance in the Asia-Pacific region. Firstly, this paper reviews why monetary and financial authorities should address climate and other sustainability risks. Secondly, this paper investigates the views of monetary authorities from the Asia-Pacific region on policies promoting sustainable finance. The results of a survey among 18 monetary authorities from the Asia-Pacific region show that most monetary authorities believe that they should play a key role in promoting sustainable finance through (i) amending the regulatory framework, (ii) encouraging green loans or (iii) by including climate change targets in their policies. Interestingly, seven out of the 18 responding monetary authorities have already established special units focusing on sustainable finance. However, policies promoting sustainable finance are implemented by monetary authorities only in five countries out of 18. Finally, this paper provides in detail review of policies promoting sustainable finance implemented by monetary authorities in six countries from the Asia-Pacific region: Bangladesh, the PRC, India, Indonesia, Singapore and Viet Nam.

The paper Green bonds for financing renewable energy and energy efficiency in South-East Asia: a review of policies (Azhgaliyeva, Kapoor, and Liu 2020) reviews green bond issuance and green bond policies in Association of South-East Asian Nations (ASEAN) countries. Firstly, it reviews trends of issuance of green bonds and use of proceeded of green bonds which were listed in the ASEAN countries as of June 2019. Around 1.5% of green bonds are listed in ASEAN countries (Azhgaliyeva 2020). Funding of green building was particularly popular in ASEAN. Around half of proceeds of green bonds listed in ASEAN were used to fund ‘green building’. In comparison globally this number is only 18%. Secondly, this paper reviews the design of green bond policies which were recently implemented in Indonesia, Singapore and Malaysia. Around 90% of green bonds listed in ASEAN countries are listed in Indonesia (58%), Singapore (18%) and Malaysia (14%). Green bond grant has become a popular policy instrument in Asia. Singapore, Malaysia, Hong-Kong (People’s Republic of China), Japan and Kazakhstan offer green bond grants to cover the cost of external review in order to label bonds ‘green’. Finally, learning from ASEAN countries this paper provides practical policy recommendation on the design of green bond grants. Green bond grants are effective in promoting green bonds; however, this does not mean that green bond grants can help to meet Intended Nationally Determined Contribution (INDC). This is because proceeds of green bonds could be used to fund projects abroad or for re-financing (repayments) of past loans, unless restricted by the policy. This review will be useful for policy-makers from authorities considering implementation of policies promoting green bonds.

The PRC is the largest green bond issuer for the past four years (2016–2019). The paper Regulating green bond in China: definition divergence and implications for policy making (Zhang 2020) investigates the divergence of the PRC’s regulations from the international standards, i.e. International Capital Market Association (ICMA) Green Bond Principle (GBP) and Climate Bond Initiative (CBI) Climate Bond Standards (CBS). Green bond standards includes four major components: (i) use of proceeds, (ii) process for project evaluation and selection, (iii) management of proceeds, and (iv) reporting. Zhang (2020) investigates only two components of the above four: (i) the use of proceeds of green bonds and (ii) reporting of the use of proceeds. ‘Use of proceeds’ determine projects which are eligible for financing using green bonds. ‘Reporting’ includes requirements on the information disclosure of the use of proceeds. The results show several divergencies in the PRC’s regulations from international standards in the use of proceeds and reporting of the use of proceeds. Firstly, the PRC’s regulations allow the use of proceeds of green bonds to finance clean coal projects, which are not eligible according to the international standards. Secondly, requirements on the frequency of reporting and how detailed information should be provided vary. The results can help the policy-makers to close the gaps between the PRC’s regulations and international standards in order to attract international investors.

The paper The political and institutional constraints on green finance in Indonesia (Guild 2020) analyses the potential of green finance in promoting renewable energy in Indonesia and identifies political and institutional barriers. The authors identified two obstacles (i) ‘lack of capacity and experience of Indonesian financial intermediaries with green finance and (ii) institutional design which makes it hard for private capital to compete against the dominance of state-owned companies in energy markets’, and (iii) ‘political influence by the extractive industries lobby’ (Guild 2020, 14). The Government of Indonesia already have implemented the regulation (Ministerial Regulation 50/2017) which reduces some of these constraints in Indonesia.

The paper Analysing the falling solar and wind tariffs: evidence from India (Chawla, Aggarwal, and Dutt 2020) examines the major determinants of renewable energy tariffs in India. The paper demonstrates that financing costs account for the largest component of renewable energy tariffs (over 50%) – thus reductions in financing costs are critical for achieving tariff reduction. The authors find that declines in equipment costs have been the major drivers of solar tariff reduction historically, which declined by nearly 45% between the beginning of 2016 and the middle of 2017. Three quarters of the tariff reduction achieved is attributable to reductions in equipment costs and only one quarter was due to reduction in financing costs. However, the paper demonstrates that reductions in financing costs will have a more prominent role to play than declines in equipment costs in the attainment of future reductions in both solar and wind tariffs. The authors claim that policies aiming to de-risk renewable energy projects could further reduce renewable energy tariffs, by reducing their financing costs. Chawla, Aggarwal, and Dutt (2020) describe three prominent risks that must be addressed in order to lower financing costs. These include (i) payment delays for purchased electricity or renegotiation of PPAs, (ii) delays in land acquisition, and (iii) curtailment of intermittent renewable energy generation. Chawla, Aggarwal, and Dutt (2020) also provide recommendations on how these risks could be mitigated. These policy recommendations are relevant not only to policy-makers from India but also could be relevant to other developing countries in Asia.

The paper Is a portfolio of socially responsible firms profitable for investors? (Rehman and Vo 2020) estimates the benefits for investments in socially responsible funds by investigating co-movement between socially responsible funds returns using maximal overlap discrete wavelet transformation (MODWT), multiscale rolling window wavelet and non-linear Granger causality. The authors use daily data of six most actively traded socially responsible funds which include a large number of stock positions within and outside the US over the period 2016–2019. The results provide an empirical evidence that combination of socially responsible funds with different asset classes in the same portfolio can yield optimal returns. However mere inclusion of socially responsible funds in a portfolio does not add diversification benefits when portfolio is formulated only using socially responsible funds. Thus, inclusion of only socially responsible funds without other asset classes is not recommended. The results are useful to private investors and governments which invest in socially responsible funds.

The Special Issue’s closing article, Sustainable Finance in Japan (Schumacher, Chenet, and Volz 2020), examines the growing role of sustainable finance in Japan. It illustrates Japan’s exposure to physical climate risks, such as sea level and temperature rises, as well as transition risks for the Japanese economy and financial system. It subsequently reviews the developments and practices in terms managing climate risks, including the emergence of green bond markets; the growing importance of environmental, social, and governance (ESG) criteria; reporting and disclosure standards; and sustainable lending by the banking sector, and assesses the role of policies and regulations in scaling up green finance and low-carbon infrastructure investments in Japan. Moreover, it describes and analyses the transitional climate risks facing the Japanese financial sector through climate scenario analysis, applying the Paris Agreement Capital Transition Assessment (PACTA) tool (Chenet et al. 2018). More specifically, it investigates the sectoral energy and technology exposure in the Tokyo Stock Price Index (TOPIX) over multiple scenarios, including the International Energy Agency’s 2°C roadmap. The article concludes with policy recommendations for aligning Japan’s financial sector with sustainable development and net-zero carbon emission goals.

Disclosure statement

No potential conflict of interest was reported by the author(s).