What Asia’s Financial Industry Can Learn From Europe’s Climate Leadership

“We cannot save a burning planet with a fire hose of fossil fuels,” said UN Secretary-General António Guterres at COP28. Yet, banks and institutional investors from Asia and the US continue to finance new exploration and expansion projects. However, the European financial industry is leading the way in adopting progressive fossil fuel phase-out policies – a result of stringent regulations and more progressive and sustainability-oriented corporation management.

With Donald Trump heading back to the Oval Office, global climate action has taken another blow. However, the projected void that the US will leave opens up the opportunity for Asian governments, corporations, banks and investors to step up. Alongside Europe, they can lead the world’s efforts in averting the worst impacts of the climate crisis.

Asian and American Banks Lead Fossil Fuel Financing

Reclaim Finance and partners find that the top 60 largest private banks have provided almost USD 6.9 trillion to fossil fuels since the Paris Agreement. Of this, USD 3.3 trillion has gone towards fossil fuel expansion. 

In 2023 alone, banks granted USD 705 billion in fossil fuel financing. This comes two years after many of the institutions on the list vowed to work towards lowering emissions as part of the Net-Zero Banking Alliance, a group of banks committed to net zero by 2050.

JP Morgan Chase was the leading financier of fossil fuel companies, with USD 40.8 billion provided in 2023. The bank is also the number one in financing fossil fuel expansion.

Japan’s Mizuho ranked second for both fossil fuel financing, at USD 37 billion, and financing for fossil fuel expansion, at USD 18.8 billion.

Citibank, one of the founding members of the Net-Zero Banking Alliance, is the second-biggest fossil fuel financier since the Paris Agreement and the biggest financier for oil gas, and coal companies expanding fossil fuels in 2023.

Asia’s Financial Industry: The Biggest Coal and Gas Supporter Globally in 2023

The Banking on Climate Chaos report finds that Japanese and Chinese banks are among the main drivers of investments in coal and gas in 2023.

Regarding LNG, the top financiers globally were Mizuho and MUFG. Alongside the Industrial and Commercial Bank of China (ICBC), they also formed the top 3 of the biggest funding providers for gas-fired power in Asia.

Three Japanese banks, MUFG, Mizuho and SMBC Group, were also the biggest financiers of companies involved in ultra-deepwater oil and gas activities. 

Regarding coal mining, 81% of the financing provided in 2023 came from Chinese banks. These included China CITIC Bank, China Merchant Bank, Shanghai Pudong Development Bank, ICBC and China Everbright Group. CITIC and China Everbright Group were also the most active financiers for metallurgical coal. 

Asian Investors Also Funding Fossil Fuels 

Over 5,200 institutional investors hold bonds and shares of coal companies, with 7,245 having investments in oil and gas expansion. The exposure equals USD 4.3 trillion. Around USD 4 trillion of the investments are in companies actively developing new fossil fuel projects.

The Investing in Climate Chaos platform, launched this year by Urgewald and 17 NGO partners, reveals that while the US and Canada lead the way, Japanese institutional investors rank third, holding USD 168 billion in bonds and shares of coal, oil and gas companies from 49 countries. However, 52% of that, USD 87 billion, is invested in Japanese fossil fuel companies. 

The biggest Japanese institutional fossil fuel investor is the Government Pension Investment Fund, the world’s largest public pension fund. Others include Mitsubishi UFJ Financial, Nomura, Sumitomo Mitsui Trust and Nippon Life Insurance. 

According to experts, this is a systemic issue for Japanese institutional investors. Today, just one Japanese insurer, SOMPO, has adopted a coal exclusion policy.

Capitalising on Europe’s Experience For Advancing Sustainability and Climate Action Within the Financial Industry

As of August 2024, just three entities from the EU make up the list of the top 50 institutional investors in coal, oil and gas companies from the Global Coal Exit List and the Global Oil & Gas Exit List. These include the French Crédit Agricole (30th), the German Deutsche Bank (31st) and Allianz (34th).

Furthermore, only European asset managers, asset owners, banks and insurance and reinsurance companies make up the list of the financial institutions with the best metallurgical and thermal coal policies. The case is the same regarding oil and gas expansion and phase–out policies.

This is not to say that European banks don’t finance fossil fuels. A recent report by Reclaim Finance and partners found that just 11 of the 20 banks analysed have a policy to end finance to new oil and gas fields. However, they are way ahead of their peers from Asia, the US and Canada. Furthermore, the momentum against fossil fuels within the European financial industry is rapidly accelerating, with banks, insurers and asset managers largely exiting the industry.

These developments have been mainly influenced by the EU’s efforts to advance the green energy transition and the shift toward more sustainable business models through both mandatory and voluntary measures.

More Stringent Requirements for Sustainability Reporting

“We want to ensure that sustainability becomes an issue for every business and not only those in the field of green energy or transport, for example,” said Andrei Gurin from the Sustainable Finance Unit at the European Commission at Climate Change Summit 2024.

To achieve this, European institutions and regulators have introduced a series of mechanisms and requirements.

“We want large corporates and listed companies to tell us how much of their activities align with the EU Green Taxonomy – our sustainability dictionary. That way, we work to prevent greenwashing and guide investors in the right direction.”

“We also have a directive for corporate sustainability reporting so that corporates can tell investors the impact of their activities and investments and the associated risks. Importantly, we want companies to have a transition plan that tells where they have to go and the money they need. Based on this information, financial markets can react and help them make that transition,” the expert added. 

“For this, we have a couple of instruments such as the Green Bond Standard, the Green Loan Standard, and climate benchmarks to help investors construct Paris Agreement-aligned instruments.”

Green Bond Standard

The Green Bond Standard, in particular, is an area where Europe is leading the way. According to the IEEFA, the development of sustainable bond markets in the ASEAN+3 region (Association of Southeast Asian Nations plus China, South Korea and Japan) is inconsistent and lags behind Europe. Taxonomies in many countries are weak or lack clarity, eroding investors’ confidence. Such issues have surfaced in countries like Japan, where green bonds have been used to finance questionable technologies. 

While the EU’s stringent approach to sustainability reporting has caused strong corporate pushback, regulators are clear: the measures are for the good of the planet, the financial industry and the companies as well. 

“These aren’t nice to have, but an existential issue in the face of an existential crisis. In that sense, sustainability reporting standards are not only compliance costs but investments in the future,” stressed Gurin.

The signs from the investment industry are that these are much-needed measures. 

“We won’t be able to finance anything without having sustainability data. And while it is true that the recently adopted first set of European Sustainability Reporting standards is quite voluminous, we shouldn’t forget that companies don’t have to report on all data points and KPIs. Instead, they are required to disclose only what is material to them, their investors and stakeholders,” said Aleksandra Palinska, executive director of Eurosif, during a panel dedicated to ESG at the Climate Change Summit 2024. Recently, Eurosif released a dedicated report for policy-makers with a series of steps and regulatory suggestions for scaling up sustainable investments.

“We strive for rules that are progressive yet implementable,” she added. 

There is a growing understanding on the corporate front that these measures are for the better. 

“Businesses even from outside the EU are keen to adopt European sustainability reporting standards so that they can reach out to international investors for financing.” 

“So, it is up to you to either see reporting as a burden or an opportunity.” 

Climate Risk Stress Testing Within the Banking Industry

Under the European Green Deal, all 27 EU member states committed to climate neutrality by 2050, pledging to reduce emissions by at least 55% by 2030, compared to 1990 levels. As part of this, the European Commission requested various European supervisory authorities and the European Central Bank to conduct a stress test on the European banking industry’s transition risk and capacity to support the shift to a green energy-led economy. 

The conclusion is that the European banking sector is resilient enough to withstand the selected adverse shocks. However, European banks needed to integrate climate risks into their risk management frameworks “as promptly and extensively as possible.”

While some Asian central banks are also exploring the idea of stress testing banks for their climate risk resilience, the practice is in a more nascent phase compared to the EU. Furthermore, organisations such as the Asia Investor Group on Climate Change, representing investors with USD 32 trillion in assets under management, and think tank China Water Risk have expressed concerns about the depth and scope of the climate risk stress tests adopted by Asian banking authorities. In fact, they urged the regions’ central banks to overhaul their climate stress tests to better align them with climate science.  

As a whole, Asian central banks are falling behind their European counterparts when it comes to adopting green policies and initiatives. According to the 2024 Green Central Banking Scorecard, no Asian country’s central bank makes the top five. China is the highest-ranked in sixth, followed by Japan in eighth, Indonesia in ninth and India in 10th.  

Acknowledging the Crucial Link Between Sustainability and Profitability Within the Financial Industry

“It is a common misconception that investing in sustainability means losing money. Nowadays, there is more and more evidence that you can make a lot of money by investing sustainably,” said Palinska.

According to Morgan Stanley, sustainable funds outperformed traditional funds in 2023 by a wide margin. Over 70% of investors believe strong ESG practices can yield higher returns. The IEEFA also comes to similar findings, noting that ESG funds continue to thrive and outperform traditional funds across equity and fixed-income asset classes.

However, the picture isn’t so black and white. The performance usually depends on various factors, including interest rates, inflationary pressure, regulatory landscape and the time frame.

“It is all about aligning the time horizon between short-term and long-term. If you optimize your business for the short term, you will make money but destroy the planet. And without the E, there won’t be S and G,” noted Kokou Agbo-Bloua, global head of economics in cross asset and quant research at Société Générale from the stage of the Climate Change Summit. The French bank is among the most progressive regarding oil and gas phase-out policies.

“If a business model isn’t transition-compatible, it will disappear in three, five or 10 years,” he added.

So is the case on the corporate front outside the scope of regulations. When convincing disbelievers in the importance of ESG and sustainability, experts are clear: talking about money usually does the trick. 

“Companies that don’t think about sustainability risks won’t be as profitable in the future anymore,” said Aleksandra Palinska.

“We usually speak with the CFOs of companies, and the most important thing they take into account is the cost of capital. If you want financing, banks and investors would ask you for ESG factors. And the better they are, the lower the cost of capital,” added Alexander Stevens, CEO at Greenomy, during a panel on ESG.

In addition, the expert noted that prioritising ESG brings companies a host of other advantages. Among them were better operational margins, becoming more resilient to climate change, improved risk management, gaining a competitive edge and ultimately becoming more appealing to internal and external stakeholders, such as employees, clients and investors. 

“Companies don’t live in a vacuum, but an ecosystem. Some see ESG as an additional cost. However, asset managers and investors use it as a framework to examine a company’s competitive edge. So, it is essentially a tool to make a company’s brand more appealing,” added Elena Cargnello, a member of energy efficiency platform Cogenio’s board of directors.

Scaling Up Public and Private Financing Remains Crucial

The EU is the biggest climate finance provider globally, with over EUR 28.6 billion in public financing in 2023. However, according to experts from the European Commission, this is still below the required levels.

“We need to invest EUR 700 billion additionally to implement the European Green Deal successfully. The public resource alone won’t be enough, and we need to mobilise the private industry as well,” said Gurin.

Eurosif, the leading pan-European association promoting sustainable finance at the European level, also notes that public investments alone won’t be enough to meet the EU’s strategic objectives and decarbonisation targets. The magnitude of the challenge necessitates scaling funding from both the private and public sectors. However, states have to take the leading role.

“I think we are living in a dichotomy where governments are pledging to phase out fossil fuels, but then they make deals in closed doors and provide record fossil fuel subsidies,” explained Palinska.

Data reveals that the world spends over USD 13 million per minute on fossil fuel subsidies.

“We won’t save the world only with private money. Research by Finance Watch reveals that, even if we exploit the full potential of capital markets, we will gather just a third of the money needed for the transition,” said Palinska. 

“The bottom line is we also need to channel public money and explore the blended finance field – mainly in projects that aren’t so appealing to private investors and for de-risking finance. Everyone has to play their role.”

The Magnitude of the Climate Crisis Requires Multilateralism  

The financial industry is integral to global climate action. However, the scale of the challenge necessitates global convergence, where governments, banks, investors and corporations from all over the world unite behind the mission to keep the Paris Agreement’s goal alive.   

“Even if the EU achieves carbon neutrality, it would be a failure if other jurisdictions from other countries don’t follow the path. We have to invest a lot in these strategic discussions to ensure we are all on the same page,” said Gurin.

Asia’s financial industry is now in the perfect position to lead global climate action alongside Europe.