Asean Initiatives And Innovations On Financing The Low Carbon Economy
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The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
ASEAN Initiatives and Innovations on Financing the Low Carbon Economy Aziz Durrani Senior Financial Sector Specialist Financial Stability, Supervision and Payments & Settlement Systems The SEACEN Centre 1
Low Carbon Financing Initiatives in ASEAN
2
Green Bonds • The defining characteristic of a green bond is how the proceeds are utilized. This would include one or more of:
o o o o o o o
Energy efficiency Renewable energy Sustainable waste management Sustainable land use Biodiversity conservation Clean transportation Clean water and/or drinking water
• This class of bonds bring risk-adjusted returns to accommodate to diverse risk preferences: investors obtain low carbon exposure without increasing their risk because the bonds carry exactly the same credit profile, and pay the same yield, as the issuer’s conventional bonds. 3
Green Bonds • The involvement of investment banks has been an important momentum in the development of the market for green bonds. For example, major investment banks such as Morgan Stanley, JP Morgan, Citigroup and Credit Agricole formulated the Green Bond Principles in January 2014, and have been underwriting green bonds. • Fiji became the first emerging market to issue a sovereign green bond late last year. • The growing green bond issuance in the region has been accompanied by the recent introduction of the ASEAN Green Bond Standards (ASEAN GBS) that will help the countries implement their commitments under the Paris Agreement and push for a standardized set of rules for green bonds.
• Globally, the green bond market is estimated to have reached US$250 billion in 2018. 4
Malaysia – Green Technology Financing Scheme (GTFS) •
The GTFS is a loan guarantee scheme, to support the development of low carbon technology in Malaysia. It was introduced in 2010.
•
The scheme provides loans at 2% p.a. lower than the standard interest rate charged by the financial institution. In addition, 60% of the loan amount will carry a government guarantee.
•
Projects eligible for financing must be located in Malaysia and must employ locally produced or imported low carbon technology.
•
The total amount of financing approvals, as at April 2017, was RM2.96bn (USD 666m) out of a total approvals target of RM3.5bn (USD 788m). A total of 272 projects had secured financing support, comprising: o o o o
•
RM233bn (USD 524m) in the energy sector RM485m (USD 109m) in the water and waste sector RM25.2m (USD 5.7m) in the transport sector RM2.4m (USD 4.8m) in the building sector.
It is anticipated that these projects would help avoid 3.2m tonnes of carbon dioxide equivalent per year, while generating RM5.5bn (USD 1.4bn) in low carbon investments and creating over 4,600 jobs.
5
Thailand – The Energy Conservation Fund • This is financing scheme that finance energy efficient and/or renewable energy projects. • Funds are collected by levying a fee on petroleum products ranging from 1 to 3 cents (US) per litre. • It has total funding of approximately USD 1.1bn.
• The Fund has been disbursed through: grants, subsidies, tax incentives, a feed-in premium for renewable energy, the Energy Efficiency Revolving Fund (EERF) and the ESCO Fund.
6
Thailand – Energy Efficiency Revolving Fund • This is a debt-financing mechanism that provides zero to low interest loans to banks for energy efficient lending. Thai banks can on-lend the funds at a maximum of 3.5% interest. • Thailand also provides tax incentives, through a combination of tax exemptions for energy efficient and renewable energy equipment, corporate tax exemptions for companies in these sectors, and for those who invest in these projects. • Thailand is also due to develop the ASEAN Centre for Sustainable Development Studies and Dialogue.
7
Indonesia – Green Bonds • Indonesia became the first country globally to issue a sovereign Sukuk green / low carbon bond in 2018. • 2018 also saw the first green bond to be issued by an Indonesian bank. With a $150 million investment from IFC, OCBC NISP Bank, a subsidiary of OCBC Singapore, launched the country’s first green bond issued by a financial institution in Indonesia. It has a tenor of 5 years.
• It is hoped that OCBC NISP Bank’s green bond issuance will increase climate financing in Indonesia, establishing green / low carbon bonds as a new asset class in the country. • IFC has been working closely with the Financial Service Authority (OJK) to develop a Sustainable Finance Roadmap, laying out a comprehensive plan for promoting sustainable finance. In July 2017, OJK issued a regulation requiring banks to develop action plans for sustainable financing and report their green and low carbon financing. 8
Other Initiatives • In the Philippines, the government is gearing up for a transition to renewable energy by raising its tax on imported coal by 15 times to US$3 a tonne. • Singapore is also implementing a carbon tax to help it reduce emissions. From 2019 to 2023, facilities that produce 25,000 tonnes or more of greenhouse gas emissions annually will be taxed S$5 a tonne. There are plans to raise this further, to between S$10 and S$15 a tonne of emissions by 2030. The tax will affect emitters accounting for 80% of Singapore's emissions.
9
Increasing Private Sector Low Carbon Financing Additional initiatives that have been discussed, in order to increase private sector investments and projects, include: o Sustainability Bond Facility for Micro Finance Institutions (MFIs) – A bond facility for financing on-lending to micro finance institutions in the region. o Syndicated Regional Green Lending Facility – A loan facility to provide midscale syndicated concessional loans to enterprises in the region. o Green and Low Carbon Lending Facility for Asia-Pacific – A lending facility aimed at smaller enterprises in Asia-Pacific. o Asia Pacific Green Bond Standard and Green Bond impact monitoring – An initiative to widen the region-wide low carbon and social bond standard, with tools to ensure continued monitoring of climate and carbon impact after the loan or bond has been issued. 10
Regulatory Solutions for Low Carbon Financing
11
Regulatory Solutions for Low Carbon Financing • Few financial institutions in Asia integrate Environmental, Social and Governance (ESG) factors into their lending or investment decisionmaking processes. Low carbon banking and sustainable investment are still a niche market, and few staff in the industry have been trained in ESG issues.
• One of the major ways that financial institutions and corporates can be encouraged to increase their use of low carbon financing initiatives is through regulatory focus. • If the Regulator / Central Bank sets standards around these, or creates incentives to use low carbon financing products, it will force banks and their customers to start making much wider use of such products.
12
Some Potential Regulatory Solutions • Some potential actions Central Banks / Regulators could take to encourage more low carbon lending include:
1.
Set-up a bespoke function or area of expertise that undertakes ESG risk reviews and grades banks accordingly. This should directly feed into the annual assessment of the bank, and the on-going supervisory strategy. Depending on the score, banks could have actions taken against them to improve their ESG adherence.
2.
Modifying the risk weights for computing capital requirements in favour of lowcarbon assets. This would make it ‘cheaper’ for corporates to opt for low carbon finance products vs. standard loans etc. However, this also carries a number of risks.
3.
Other quantitative macro prudential policies aimed at easing lending conditions for low carbon firms. 13
Examples of Regulatory Actions – BoE & PRA • The BoE / PRA now consider climate-related financial risks to regulated firms as part of the Bank’s approach to prudential supervision. o The PRA is currently initiating an internal review of the impact of climate change on PRA-regulated institutions in the UK banking sector. o This will involve more granular research into firm-level exposures to physical and transition risks. It will also include considering the relevance of climate-related factors to the PRA’s existing approach to supervision, including stress testing, business model analysis and other aspects of firm supervision. o In early December 2016, the PRA joined a group of insurance regulators from multiple jurisdictions to establish the Sustainable Insurance Forum, an initiative to strengthen insurance regulators’ understanding of, and responses to, sustainability challenges. o The review of the UK banking sector will follow a similar process to that already completed for insurance firms. It will include a mix of internal research and engaging with selected firms through a combination of surveys and bilateral meetings. 14
Network for Greening the Financial System • The Network is a voluntary platform and a forum for authorities to exchange views and best practices with regards to climate related risks for the financial sector and the development of low carbon finance. • It is the only forum worldwide bringing together central banks and supervisors committed to better understand and manage the financial risks and opportunity of climate change. Its objective is not to replicate the work conducted elsewhere but to build on and enrich it where necessary. • Any supervisor or central bank committed to better understand and manage the financial risks and opportunity of climate change is welcome to join.
15
Members of the Network for Greening the Financial System • • • • • • • •
Banco de Mexico Bank of England Banque de France De Nederlandshe Bank Deutsche Bundesbank Finansinspektionen (Swedish FSA) Monetary Authority of Singapore The People’s Bank of China
16
Network for Greening the Financial System – Proposed Actions • “Develop forward-looking carbon stress tests for both insurance companies and banks – a complex and difficult task, but essential. Rather than a ‘green supporting factor’, we should target ‘brown assets’ (those harmful to the climate) with a brown penalising factor” (François Villeroy de Galhau, Governor of the Banque de France). • “Once climate change becomes a defining issue for financial stability, it may already be too late. Our responsibility is to work to position the financial system as a whole so that it can adapt in a harmonious, efficient and orderly manner to the evolution of climate policies“ (Mark Carney, Governor of the Bank of England). 17
Q&A
18
Aziz Durrani Senior Financial Sector Specialist Financial Stability and Supervision and Payment & Settlement Systems [email protected] +60 39195 1812
20
ASEAN Initiatives and Innovations on Financing the Low Carbon Economy Aziz Durrani Senior Financial Sector Specialist Financial Stability, Supervision and Payments & Settlement Systems The SEACEN Centre 1
Low Carbon Financing Initiatives in ASEAN
2
Green Bonds • The defining characteristic of a green bond is how the proceeds are utilized. This would include one or more of:
o o o o o o o
Energy efficiency Renewable energy Sustainable waste management Sustainable land use Biodiversity conservation Clean transportation Clean water and/or drinking water
• This class of bonds bring risk-adjusted returns to accommodate to diverse risk preferences: investors obtain low carbon exposure without increasing their risk because the bonds carry exactly the same credit profile, and pay the same yield, as the issuer’s conventional bonds. 3
Green Bonds • The involvement of investment banks has been an important momentum in the development of the market for green bonds. For example, major investment banks such as Morgan Stanley, JP Morgan, Citigroup and Credit Agricole formulated the Green Bond Principles in January 2014, and have been underwriting green bonds. • Fiji became the first emerging market to issue a sovereign green bond late last year. • The growing green bond issuance in the region has been accompanied by the recent introduction of the ASEAN Green Bond Standards (ASEAN GBS) that will help the countries implement their commitments under the Paris Agreement and push for a standardized set of rules for green bonds.
• Globally, the green bond market is estimated to have reached US$250 billion in 2018. 4
Malaysia – Green Technology Financing Scheme (GTFS) •
The GTFS is a loan guarantee scheme, to support the development of low carbon technology in Malaysia. It was introduced in 2010.
•
The scheme provides loans at 2% p.a. lower than the standard interest rate charged by the financial institution. In addition, 60% of the loan amount will carry a government guarantee.
•
Projects eligible for financing must be located in Malaysia and must employ locally produced or imported low carbon technology.
•
The total amount of financing approvals, as at April 2017, was RM2.96bn (USD 666m) out of a total approvals target of RM3.5bn (USD 788m). A total of 272 projects had secured financing support, comprising: o o o o
•
RM233bn (USD 524m) in the energy sector RM485m (USD 109m) in the water and waste sector RM25.2m (USD 5.7m) in the transport sector RM2.4m (USD 4.8m) in the building sector.
It is anticipated that these projects would help avoid 3.2m tonnes of carbon dioxide equivalent per year, while generating RM5.5bn (USD 1.4bn) in low carbon investments and creating over 4,600 jobs.
5
Thailand – The Energy Conservation Fund • This is financing scheme that finance energy efficient and/or renewable energy projects. • Funds are collected by levying a fee on petroleum products ranging from 1 to 3 cents (US) per litre. • It has total funding of approximately USD 1.1bn.
• The Fund has been disbursed through: grants, subsidies, tax incentives, a feed-in premium for renewable energy, the Energy Efficiency Revolving Fund (EERF) and the ESCO Fund.
6
Thailand – Energy Efficiency Revolving Fund • This is a debt-financing mechanism that provides zero to low interest loans to banks for energy efficient lending. Thai banks can on-lend the funds at a maximum of 3.5% interest. • Thailand also provides tax incentives, through a combination of tax exemptions for energy efficient and renewable energy equipment, corporate tax exemptions for companies in these sectors, and for those who invest in these projects. • Thailand is also due to develop the ASEAN Centre for Sustainable Development Studies and Dialogue.
7
Indonesia – Green Bonds • Indonesia became the first country globally to issue a sovereign Sukuk green / low carbon bond in 2018. • 2018 also saw the first green bond to be issued by an Indonesian bank. With a $150 million investment from IFC, OCBC NISP Bank, a subsidiary of OCBC Singapore, launched the country’s first green bond issued by a financial institution in Indonesia. It has a tenor of 5 years.
• It is hoped that OCBC NISP Bank’s green bond issuance will increase climate financing in Indonesia, establishing green / low carbon bonds as a new asset class in the country. • IFC has been working closely with the Financial Service Authority (OJK) to develop a Sustainable Finance Roadmap, laying out a comprehensive plan for promoting sustainable finance. In July 2017, OJK issued a regulation requiring banks to develop action plans for sustainable financing and report their green and low carbon financing. 8
Other Initiatives • In the Philippines, the government is gearing up for a transition to renewable energy by raising its tax on imported coal by 15 times to US$3 a tonne. • Singapore is also implementing a carbon tax to help it reduce emissions. From 2019 to 2023, facilities that produce 25,000 tonnes or more of greenhouse gas emissions annually will be taxed S$5 a tonne. There are plans to raise this further, to between S$10 and S$15 a tonne of emissions by 2030. The tax will affect emitters accounting for 80% of Singapore's emissions.
9
Increasing Private Sector Low Carbon Financing Additional initiatives that have been discussed, in order to increase private sector investments and projects, include: o Sustainability Bond Facility for Micro Finance Institutions (MFIs) – A bond facility for financing on-lending to micro finance institutions in the region. o Syndicated Regional Green Lending Facility – A loan facility to provide midscale syndicated concessional loans to enterprises in the region. o Green and Low Carbon Lending Facility for Asia-Pacific – A lending facility aimed at smaller enterprises in Asia-Pacific. o Asia Pacific Green Bond Standard and Green Bond impact monitoring – An initiative to widen the region-wide low carbon and social bond standard, with tools to ensure continued monitoring of climate and carbon impact after the loan or bond has been issued. 10
Regulatory Solutions for Low Carbon Financing
11
Regulatory Solutions for Low Carbon Financing • Few financial institutions in Asia integrate Environmental, Social and Governance (ESG) factors into their lending or investment decisionmaking processes. Low carbon banking and sustainable investment are still a niche market, and few staff in the industry have been trained in ESG issues.
• One of the major ways that financial institutions and corporates can be encouraged to increase their use of low carbon financing initiatives is through regulatory focus. • If the Regulator / Central Bank sets standards around these, or creates incentives to use low carbon financing products, it will force banks and their customers to start making much wider use of such products.
12
Some Potential Regulatory Solutions • Some potential actions Central Banks / Regulators could take to encourage more low carbon lending include:
1.
Set-up a bespoke function or area of expertise that undertakes ESG risk reviews and grades banks accordingly. This should directly feed into the annual assessment of the bank, and the on-going supervisory strategy. Depending on the score, banks could have actions taken against them to improve their ESG adherence.
2.
Modifying the risk weights for computing capital requirements in favour of lowcarbon assets. This would make it ‘cheaper’ for corporates to opt for low carbon finance products vs. standard loans etc. However, this also carries a number of risks.
3.
Other quantitative macro prudential policies aimed at easing lending conditions for low carbon firms. 13
Examples of Regulatory Actions – BoE & PRA • The BoE / PRA now consider climate-related financial risks to regulated firms as part of the Bank’s approach to prudential supervision. o The PRA is currently initiating an internal review of the impact of climate change on PRA-regulated institutions in the UK banking sector. o This will involve more granular research into firm-level exposures to physical and transition risks. It will also include considering the relevance of climate-related factors to the PRA’s existing approach to supervision, including stress testing, business model analysis and other aspects of firm supervision. o In early December 2016, the PRA joined a group of insurance regulators from multiple jurisdictions to establish the Sustainable Insurance Forum, an initiative to strengthen insurance regulators’ understanding of, and responses to, sustainability challenges. o The review of the UK banking sector will follow a similar process to that already completed for insurance firms. It will include a mix of internal research and engaging with selected firms through a combination of surveys and bilateral meetings. 14
Network for Greening the Financial System • The Network is a voluntary platform and a forum for authorities to exchange views and best practices with regards to climate related risks for the financial sector and the development of low carbon finance. • It is the only forum worldwide bringing together central banks and supervisors committed to better understand and manage the financial risks and opportunity of climate change. Its objective is not to replicate the work conducted elsewhere but to build on and enrich it where necessary. • Any supervisor or central bank committed to better understand and manage the financial risks and opportunity of climate change is welcome to join.
15
Members of the Network for Greening the Financial System • • • • • • • •
Banco de Mexico Bank of England Banque de France De Nederlandshe Bank Deutsche Bundesbank Finansinspektionen (Swedish FSA) Monetary Authority of Singapore The People’s Bank of China
16
Network for Greening the Financial System – Proposed Actions • “Develop forward-looking carbon stress tests for both insurance companies and banks – a complex and difficult task, but essential. Rather than a ‘green supporting factor’, we should target ‘brown assets’ (those harmful to the climate) with a brown penalising factor” (François Villeroy de Galhau, Governor of the Banque de France). • “Once climate change becomes a defining issue for financial stability, it may already be too late. Our responsibility is to work to position the financial system as a whole so that it can adapt in a harmonious, efficient and orderly manner to the evolution of climate policies“ (Mark Carney, Governor of the Bank of England). 17
Q&A
18
Aziz Durrani Senior Financial Sector Specialist Financial Stability and Supervision and Payment & Settlement Systems [email protected] +60 39195 1812
20
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