Asia accounts for more than half of global greenhouse gas emissions and lies at the front line of increasingly frequent and severe climate disasters. So it was a real privilege for Frankfurt School to deliver a new course on scaling up sustainable finance to a group of 15 central banks from the region. As part of a broader curriculum designed by the ASEAN training centre our course will be delivered regularly and build capacity among regulators and supervisors to support the climate transition of their financial systems.
While this new FS course could draw on our track record of graduate and executive teaching in the field, it also presented some novel challenges. Crucially, our understanding of financial regulation and private sector regulation that is rooted in Europe needed to adapt to the Asia context. In teaching the course in Singapore last week, three key differences stood out for me.
The first lies in the greater interest in Asia in scaling up the co-called transition finance. This form of finance funds companies that adopt a credible climate strategy yet may not have purely green projects available in sufficient scale and quality. In the view of governments and regulators, companies in ‘hard to abate’ sectors, such as cement or shipping, should not be precluded from new forms of sustainable finance as they transition to the low-carbon economy. Japan’s ministry of finance, for instance, just announced that a significant volume of transition bonds will be issued. This contrasts with a fairly sharp distinction between green and other activities in European bond and loan markets. The emerging standards for transition finance should contain ‘greenwashing’ though they will need to be applied strictly by regulators in local markets.
A second key difference is Asia’s still heavy reliance on coal and other fossil fuels in energy sectors and its more extended transition to renewables. The risk of ‘stranded assets’ is, therefore, much more prominent than in Europe. The phase-out of coal-fired power will require a clear national transition strategy, which is often lacking and may require support from development partners. The Asian Development Bank (ADB) presented its new scheme in our course, which also seeks to leverage private finance in this effort.
Finally, cross-border capital flows within the Asia region will need to contend with widely different types of government support and transition paths. In Europe, a common net-zero goal has been set and is reasonably credible. Yet, several jurisdictions in Asia have set ambitious targets. Our hosts in Singapore, for instance, adopted a comprehensive sustainable finance strategy in 2019, which is now being implemented, leveraging the city state’s widely respected ‘whole-of-government’ approach. The central bank presented a new fintech solution in our course, underlining how ESG data could be made widely accessible to financial markets.
With this context, our course needed to deliver skills and expertise that would be directly relevant to the work of financial supervisors and regulators in the region. For many forms of sustainable finance, regulators can draw on the experience and best practices elsewhere, for instance, in building a local market for green bonds. As in Europe, debt capital markets play a central role in Asia and demand high standards in corporate governance and market integrity. But teaching sustainable finance, be it to the public or private sector, inevitably needs to open up other professional silos, crucially drawing on climate science and energy economics. We, therefore, also sought to provide context so that central banks can engage in a dialogue with their governments, the local financial sector and international development partners. Work on climate risk insurance at Frankfurt School provided intriguing case studies on how the private sector can be engaged in an effort to adapt to climate change. Also, the combination of public and private resources through so-called blended finance can overcome some key barriers and market failures in climate finance. A new Singapore-based fund was presented in our course, which will further establish the city’s role as a sustainable finance hub in the region.
After a rich set of discussions and a week in a key financial centre in the region, I was left with the question of how a course like this can support efforts to keep ideas and capital flows between Europe and Asia. EU capital markets will need to remain open to Asia’s markets, which account for a global share of activity twice as large as in Europe and which are set to grow further. European investors must find more ways to access a region that will need to be central where the impact on climate change is part of an investment mandate.
One key theme in our discussions in the course was the need to prevent sustainable finance classifications from creating barriers to international capital flows. If well designed, a low-carbon project and/or corporate bond in the Asia region should be investable for EU-based investors just as much as a European equivalent. Courses such as ours should create a shared understanding of green finance, whether it is to build resilience to climate hazards, for green projects or in supporting the now urgent climate transition.