Unfinished Business

Climate risks remain a priority as nature issues rise up the agenda for investors and corporates at a recent Hong Kong roundtable held by S&P Global Sustainable1 and ESG Investor.

Corporates and investors across Asia Pacific are well aware of the growing need to push beyond the current “nascent stage” of understanding the nature risks in their businesses and portfolios. But they also recognise that much progress is still required on the existing challenge of obtaining an accurate and comprehensive picture of climate risks.

A few weeks after the release of the final recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD), major organisations operating in the region see their relationship with nature rising up their collective agendas. Discussing climate and nature risks at roundtable hosted in Hong Kong in early October by ESG Investor and S&P Global Sustainable1, organisations acknowledged the links between the two.

“If you have a net zero commitment, agriculture, forest and land use is one of the highest emitting sectors, so you really need to understand those risks and impacts, which can serve as a gateway into understanding the different various elements of nature,” said Monica Bae, Director of Investor Practice at the Asia Investor Group on Climate Change (AIGCC).

The parallels between the disclosure and risk management frameworks of the TNFD and its forerunner, the Task Force on Climate-related Financial Disclosures (TCFD), are welcomed as easing the disclosure burden, but few under-estimate the challenge ahead.

“It’s good to see support for TNFD but I expect a lot of challenges to rise to the surface when we get down to implementation,” said Kit Fong Law, Principal Manager for Strategic Planning, Group Sustainability at CLP Holdings.

Asset owners and managers are beginning to engage with corporates and data providers to make the improvements to nature-related information flows they will need to inform future investment decisions. But with regulators and exchange operators across Asia Pacific actively drawing up their plans for mandatory climate disclosures, there is a strong focus on this more immediate challenge.

Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group – co-led by the Hong Kong Monetary Authority and Securities and Futures Commission – confirmed in August it was working on a “comprehensive roadmap” for adopting the first two standards issued by the International Sustainability Standards Board.

Meanwhile, Hong Kong Exchanges and Clearing has outlined plans for mandatory climate risk reporting requirements in line with the ISSB’s climate standard, applying to ESG reports published in 2025. To date, for climate disclosures, issuers have only been required to ‘comply or explain’.

Heavy lifting

Large corporates and financial institutions across the Asia Pacific region have been reporting their greenhouse gas (GHG) emissions and climate-risk management processes and strategies with increasing levels of detail over the past decade, initially on a voluntary basis. But the pace of incoming regulatory and reporting requirements has thrown up many challenges.

“Industry members have indicated that more capacity building is needed regarding upcoming regulatory requirements, including standards, disclosures, taxonomies, as well as how to access and capture Scope 3 emissions data,” said Jenny Lee, Deputy Secretary General of the Hong Kong Green Finance Association.

For highly regulated companies such as energy utilities much of the heavy lifting has been done.

“The climate data challenge is one of definition as well as collection. For a firm like ours, with 600 operating entities in the Chinese mainland, across multiple sectors, and employing a large range of contractors, there are many practical challenges relating to emissions reporting. Verification can be a very time-consuming and painful process,” said Isaac Yeung, Head of Corporate ESG at the Hong Kong and China Gas Company, known locally as Towngas.

“But having gone through that process, we should be able to adapt to evolving standards.”

According to CLP’s Law, there are many variables impacting the ability of utilities and other firms to deliver accurate climate-reported disclosures. “We may be buying clean energy from the grid during the daytime, but then we have to operate some of our baseload assets during the night. As such the electricity is the same, but the emissions are different,” she said. Law also noted that the GHG Protocol, as a principles-based framework, does not always provide firms with the required level of granularity, but welcomed its current review as opportunity to “ensure its effectiveness” to support businesses in today’s circumstances.

“Much depends on the region the corporation operates in, as well as its data analytics capability, as to whether it can supply close-to-perfect data in a timely and available manner,” she added.

Mixed picture

Do climate-related disclosures provide investors with the decision-useful information they need as they seek to reduce portfolios emissions while orientating capital to climate-positive investments?

Hideki Suzuki, Senior Director for Sustainable Investing at Manulife Investment Management, responsible for supporting multiple portfolio managers and analysts, suggested the picture is mixed.

“For a large cap equity team that holds blue chip companies in developed markets, it’s fairly straightforward to provide the necessary climate data, because service providers tend to cover that space pretty well, but it gets difficult with small cap or emerging markets,” he said.

“We are certainly not waiting for the perfect datasets to come along. We have to work with what we’ve got.”

Investors find variable levels of visibility on climate risks across markets and asset classes said Nadelina Naydenova, Director, Group ESG at privately-owned Hong Kong-based FWD Group.

“As an insurer operating in 10 markets across Asia, managing a portfolio that’s predominantly fixed income, our preferred choice is trying to achieve impact through engagement. Working with our asset managers, we want to get a sense of the extent to which issuers are trying to change as a first step.”

This can be challenging in certain asset classes, including fixed income, obliging institutional investors to develop proprietary means to accurately calculate their carbon footprint.

For most asset managers and owners, securing required levels of information on climate disclosures means assembling a range of internal and external resources, in short, coming at the challenge from a variety of angles.

Gareth Hewett, Head of International ESG at Ping An, one of China’s largest insurers, said the firm tapped inputs from multiple sources, also putting them to multiple uses.

“More disclosures from issuers will help us. But you’re never going to get perfect information, so you need to be able to model. We also use that modelling for our own insurance business purposes, in terms of risk mitigation, adaptation and resilience,” said Hewett.

Voluntary climate-related disclosures can raise as many questions as answers, in part because of the varying levels of compliance with the disclosures recommended by the TCFD. In its latest and last status report, the TCFD said that 58% of companies now disclose in line with at least five of the its 11 recommended disclosures, up from 18% in 2020.

Quantitative and qualitative

Unsurprisingly, investors are seeking further detail about the emissions profiles and decarbonisation plans of investee companies. “When we engage with companies, we look at quantitative measures such as Scopes 1-3, but we also want to look at other metrics, both quantitative and qualitative,” said William Ng, Investment Stewardship Director at HSBC Asset Management.

These might include capex plans and their alignment with the company’s climate strategy, but also net zero commitments, as well as the policies they are or are not supporting through lobbying. There are also emerging topics, such as just transition, where data is very sparse.”

According to Matthew Phan, Senior Director, Financials Credit Research and ESG at SunLife Financial, there can be challenges presenting an investment case to portfolio managers when data fluctuates over time.

“For example, portfolio emissions intensity can vary due to changes in investment mix and scope of assets covered under certain emissions targets,” he said. 

“While our intensity-based measures help us maintain data normalization, it is imperative that we engage our CIO and portfolio managers on net zero, ensuring we all understand the data, the baselines, and targets, and how these data shifts can occur over time.”

How firms consider impacts on workers, consumers, supply chains and other stakeholder in their pathway to net zero emissions is just one element of their transition planning. New frameworks are being developed to create a common standard, which should help investors to assess the pace and credibility of investee firms’ transition plans.

While recognising the importance of such information, Matthew Chan, Head of Sustainability and ESG Engagement, Asia Pacific at JP Morgan, sounded a note of caution about turning transition disclosure guidelines into mandatory requirements.

“Transition planning is very much a strategic business exercise. You have to think about what’s happening in your commercial environment, and what’s changing in the economy, particularly around energy transition,” he said.

“It’s very difficult to regulate that. There is also a risk here if prescribed transition planning frameworks aren’t thought about from an Asian perspective, particularly if they get rolled into regulation without thinking about the consequences for this region, including emerging markets’ unique challenges.”

Some roundtable participants suggest the challenge of developing frameworks suitable for all regions went beyond transition planning.

For organisations operating in a region where many governments have only committed to carbon neutrality by 2060 or 2070, the question about whether the transition away from carbon-intensive industries should take place at the same pace as countries that have benefited from them for a longer time.

The climate-nature nexus

With so much unfinished business in understanding and managing climate risks, it is perhaps unsurprising that some investors see nature risk disclosures as a somewhat burdensome further consideration, while others see it as a logical extension of existing efforts.

“Among Asian investors, we see two main attitudes to nature. One group continues to prioritise only climate, while the second are keen to understand nature-related risks and explore the opportunities of nature-based solutions,” said Bae at the AIGCC.

Any while investors may typically be aware of the climate-nature nexus, this may not apply to all the constituents of their portfolios.

“We believe it is important to recognise the interconnectedness between climate and nature risks and opportunities, and for companies to understand their nature-related impacts and dependencies in their own materiality assessments,” said Ng at HSBC Asset Management.

“Alongside investor engagement and initiatives such as the TNFD, regulation would further drive awareness, but that may not be on the immediate horizon.”

While it is expected that the TNFD disclosure framework will take a similar path to the TCFD, with its recommendations being incorporated into regulation, it is unclear at this stage how long this will take, even though it’s generally assumed to be a shorter process.

Yeung at Towngas, which is one of the 240 organisations to have conducted a TNFD pilot project, says impending disclosure regulation is not the only driver of action.

“Half of our revenue is generated from the Chinese mainland, so we are very aware of the government’s priorities for nature. China’s fourteenth five-year plan includes 20 KPIs, five of which are related to nature and climate. The presidency’s focus on nature is also reflected in China’s first National Ecology Day on 15 August,” he said.

Core pillars

The TNFD disclosure framework deliberately builds on that of the TCFD, adding just three extra categories to the latter’s 11, meaning its core pillars are already well understood, even if other aspects may be less so.

“We’d expect that for investee companies that are already doing a good job of reporting against TCFD’s framework – for climate governance, strategy, risk management, metrics and targets – then using the TNFD framework should not be too difficult, at least for governance and strategy,” said Hideki at Manulife.

“Coming from a corporate point of view, the fact that the TNFD mirrors the TCFD in terms of disclosures is helpful,” agrees CLP’s Law, who nevertheless warned: “But implementation via the LEAP process is very challenging, not least because, unlike climate, the local context needs to be taken into consideration.”

The TNFD encourages organisations to identify and assess key nature issues on a step-by-step basis, asking them to ‘Locate, Evaluate, Assess, Prepare’. As Law noted, location is critical.

“Nature-related dependencies and impacts – the ultimate sources of risks and opportunities – are location- specific. Location therefore matters greatly for the identification, assessment and management of nature-related risks and opportunities for your organisation,” according to the TNFD.

Location of assets is the first step to understanding their interaction of nature, but the task becomes harder when the map is being redrawn.

“By signing up to the Global Biodiversity Framework’s 30 by 30 commitments, governments have committed to expanding protected areas, meaning these are likely to increase and encompass all key biodiversity areas,” said Lauren Smart, Chief Commercial Officer at S&P Global Sustainable 1.

“That’s not currently the case – many mining concessions are in key biodiversity areas. But once those concessions are included in protected areas, the ability of those companies to exploit or operationalise those assets becomes much more challenging. This has echoes of the issue of stranded assets arising from decarbonisation of the energy supply over the past decade or so.”

Rich in biodiversity

Corporates are facing up to these challenges globally, but Asia Pacific includes several regions rich in biodiversity, meaning scrutiny is likely be increasingly rigorous.

“When you look at biodiversity risk exposure, you find some companies in Southeast Asia being highly exposed, but they’re at a nascent stage of trying to understand these risks,” said Mark de Silva, Investment Stewardship Director at HSBC Asset Management.

“Some companies operating in the region have NDPE (no deforestation, no peat and no exploitation) commitments or forestry policies, but their understanding of the risk exposure within a certain biome is at very early stages. Most of our engagement conversations at this stage are about raising awareness of these risks.”

Phan suggested current levels of visibility across firms’ operations were currently insufficient to understand their nature risks – or uncover opportunities – effectively.

“Investors face a lot of challenges from a nature risk and opportunity perspective. If you invest in a palm oil producer that asserts it follows Roundtable on Sustainable Palm Oil rules, it is extremely hard to verify this all the way along their supply chain; you can use assessments but at some point, you have to take the company’s word for it,” he said.

“When it comes to opportunities, we see a strong pipeline of transition assets as firms move toward net zero, but at present is harder to identify nature-positive assets.”

Because of the complex, location-specific and inter-related character of nature risks, roundtable participants acknowledged that investors and their service providers will need to enhance their existing capabilities on their journey to developing a more sustainable relationship with nature.

“Compared with carbon, both footprinting and managing our biodiversity risk is challenging. But we’re encouraged at how the data provider landscape is emerging. Two years ago, we saw vendors offering indicators of mean species abundance, but that’s now moved on and broadened out,” said Manulife’s Suzuki.

A key next step for investors in Asia Pacific and globally, suggested Smart, was to “roll” the TNFD’s targets and metrics up to the portfolio level and begin to understand nature through the lens of nature related risks.

“We’re all at the beginning of a journey to understand better how to quantify and translate nature related risks into something that is financially relevant. Clearly, there is work to do from a capacity building perspective. When looking to translate nature into finance risk, there are some more straightforward areas, including water availability and real estate damage from the physical risks of climate change, but impact on biodiversity from operations may at first seem more nebulous.”

Alpha and beta

While risk assessment might be uppermost in the minds of Asia Pacific investors, as evidence of a twin climate and nature crisis develops, there remains a strong awareness of the need to seek out opportunities to deliver returns to end-beneficiaries.

Particularly in the retail space, the volatility and shocks of the last 18-24 months weigh heavily. “It is really challenging to offer ESG investments to retail investors,” admitted Kenny Wen, Head of Investment Strategy at KGI Asia.

“After a challenging period for investment over the past several years, they do not want to put an extra limitation on their investment decisions. They may support environmental protection, but they will do it in their daily life instead.”

Nevertheless, the gathering pace of the net zero transition means that institutional investors are confronted with a widening range of investment opportunities across the region.

“Our recent asset owners roundtable focused on climate-led investing, specifically allocating capital to support the transition, including renewable energy sources,” said Bae at AIGCC. “Often this involves the deployment of ‘patient capital’ into projects with long-term investment horizons. There are different approaches to net zero investment that asset owners need to address simultaneously – a focus on portfolio decarbonisation and increased alignment of capital towards net zero.”

To date, opportunities for nature-positive investment are less developed, but innovations are rapidly emerging, including in the fields of nature-focused sustainability-linked bonds, and biodiversity credits.

“Obtaining disclosures and data is one part of the puzzle, but you also need to connect that to financing, and take into account the requirements of banks and investors to secure financing for nature-positive projects.  For the financial institutions and investors we engage with, it’s still a relatively nascent but evolving product area,” said the HKGFA’s Lee.

These nature-related investment opportunities are expected to mature and evolve rapidly, But, as HSBC Asset Management’s Ng noted, viewing investment through a nature lens may deliver its biggest benefits through the protection of returns from existing assets.

“In Asia, we talk a lot about how we can generate alpha, but probably not enough about the risks to beta from systemic risks, such as biodiversity or labour rights,” he said. “These are very relevant to universal owners and other diversified asset owners and managers. If these issues are not well managed, or engaged on, we might get great alpha today, but these risks can crystallise, leading to systemic collapses or tipping points.”

“In Asia, there is a strong focus on generating alpha, but probably not enough about the risks to beta from systemic risks, such as biodiversity or labour rights,” he said. “These are very relevant to universal owners and other diversified asset owners and managers. If these issues are not well managed, or engaged on, we might get great alpha today, but these risks can crystallise, leading to systemic collapses or tipping points that impact the broader portfolio.”

All roundtable participants were speaking in a personal capacity and the views expressed do not reflect those of the firms they represent.


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