Episode 5: Financing a Just Transition

Full transcript

Ivy Kuo: Hello, I'm Ivy Kuo, Asia Pacific's ESG leader at PwC, and you're listening to ESG: Defining Asia Pacific's Future. This podcast series provides insights on the latest sustainability trends in the region to help you solve today's challenges and prepare to take on tomorrows. In the second session, we focus on Asia Pacific's just transition to net-zero, and I'm delighted to introduce you to PwC's expert in this topic, Kirsty Haymon.

Kirsty Haymon: Thanks, Ivy, for the introduction. There's an increasing call to action to ensure that the shift to net-zero is fair and inclusive. In this second season, we will be exploring how stakeholders can achieve an environmentally sustainable global economy, while also ensuring no one gets left behind. We have a great lineup of speakers covering topics from energy, justice and human rights to community resilience and workforce transformation. Our guests will be sharing their views on Asia Pacific's just transition, and the strategies being deployed in the region to drive inclusive opportunities for those most impacted by the shift away from carbon intensive activities. Please note that the opinions expressed in this podcast are solely those of the speakers, and do not reflect the views or opinions of any organisations with which they may be affiliated. Let's get started.

Welcome to our fifth and final podcast on Asia Pacific's just transition. Today's discussion will focus on the role of financial institutions in enabling not just the net-zero transition but ensuring that it is fair and equitable. Their influence will determine what gets funded and when, for how long, and under what conditions. 

With me today to share their insights of the roles of their respective institutions, Jaclyn Dove, Managing Director of Sustainable Finance at Standard Chartered in Singapore, and Ryuta Suzuki, Director General of the Environmental Assessment Office from the Japanese Bank for International Cooperation. Thanks to you both for joining me today.

Ryuta-san, I understand that your current position and responsibilities sitting in the risk management group as you do, primarily focuses on managing environmental risks of JBIC's portfolio. You've also shared with me recently that you'll be joining the Energy and Natural Resources Finance Group as a sign, I think, of the need for the bank to balance those complex trade-offs between financing the social economic and environmental issues, and carbon reduction goals. Can you give us some insight into how JBIC has been transforming its approach to financing the net-zero transition.

Ryuta Suzuki: Okay. Thank you, Kirsty, for the kind introduction. JBIC has been established as a Japanese government organisation to contribute to the sound development of the international economy and society, so the just transition is a very key issue for the Japanese government and JBIC itself. We always pay attention to be realistic and practical to materialise the economic development, energy security, and environmental conservation. So, we are now promoting the sustainable and inclusive finance to support the transition from the fossil fuel power plant to renewable energy, which does not occur in one day, hopefully with Japanese technology, and also the safeguard measures have been taking place by the project proponent. That's our challenge these days.

Kirsty Haymon: As part of that change and that process, you've now got in place a climate change policy, and I think you recently updated the ESG policy and environmental guidelines to incorporate aspects around human rights, so I'd love to ask you some more questions around that later on but let me first go to Jaclyn. Thanks again.

From Standard Chartered perspective, your role is similarly being shaped like Ryuta-san's around your bank's approach to sustainable finance. Can you share with us some of the strategic initiatives?

Jaclyn Dove: Sure. Thank you, Kirsty. It's a pleasure to be on this podcast and talking with you today. I think, and again, from a Standard Chartered perspective, we made the commitment to be net-zero in our own operations by 2025, and our financed emissions by 2050. We were one of the leading banks to publish a transition finance framework, and have specific targets set for the high carbon intensive sectors as part of the net-zero targets that we set.

When we speak around decarbonisation, and some of those large emitting sectors in our portfolio, one of those targets were around our oil and gas sector, which is to reduce by 29% of absolute financed emissions for the sector by 2030. With that, you can appreciate there is an education that is required, and part of my role is really around how we take those ambitions and those commitments, we ensure the integration of the decision-making that is required as part of our credit allocation, or capital allocation to the clients in those sectors. But it's also then providing the tools, the data, the capabilities for our bankers within the frontline, to advise and provide the products and services to our clients in those sectors to facilitate their transition.

In some of these sectors, it is in varying levels of maturity, not least also the varying levels of maturities and capabilities for some of our colleagues. My role really is about that enablement piece of embedding end-to-end sustainability through the decision-making, but also the opportunity spotting that will facilitate the just transition of our clients, which is not easy, particularly in the markets that Standard Chartered is present, which are some of the markets that are most effected by the social and environmental impacts of climate change.

Kirsty Haymon: Obviously, this is a complex area that has so many interacting factors, and it's a huge responsibility for banks to make sure that they strike this balance.

Ryuta, if I can just turn back to you for a moment, and you touched on your introduction around energy security, and this is something that consistently comes up, and I think also mentioned there by Jaclyn in terms of the developing economy context in Asia Pacific.

There's obviously some investment that is still going to be required to ensure that energy continues to be produced. What role and responsibility do financial institutions have to strike that balance in ensuring ongoing energy production with the right type of energy production, and how might that be balanced?

Ryuta Suzuki: The responsibility of the public finance institution is to make sure that the project is in line with the energy policy of the host country. Basically, each country has the net-zero strategy or decarbonisation strategy, so in case we are going to support the fossil fuel power plant, which is necessary in this region, we have to check whether that new project has been equipped with the latest technologies to reduce GHG emission as much as possible, and also whether that is in line with the long-term strategy to materialise carbon neutrality.

Kirsty Haymon: I think you have experience in not just the supply, but also the demand supply side of things. You were involved in a deal when you were based in Central Asia, in Türkiye, and it was really looking at the enablement of technology for this demand side. How does JBIC consider this to be supporting the just transition?

Ryuta Suzuki: Unfortunately, we do not have any magical tool to change the world one day, so we need to spend some more years dealing with fossil fuel, so until that time, meanwhile we need to support energy conservation, energy efficiency.

The particular example can be seen in Türkiye. Türkiye has been also relying on the gas imported from Russia. Energy conservation is the top agenda for their government. To contribute to that policy, and also to promote Japanese advanced technologies, we have created a new facility to encourage energy efficiency projects in Türkiye by extending the favourable terms, conditions launched to the Turkish government-owned banks.

As long as the project proponent applies advanced technologies for energy efficiency, we can support those projects. Also, we believe that this facility could be applied in many countries in the Asia Pacific Region, where energy efficiency is the key challenge to achieve carbon neutrality in the region.

Kirsty Haymon: Jaclyn, like JBIC, Standard Chartered is also reducing its exposure to the high emitting sectors, and in fact, you mentioned this target of financed emissions by 2050. Is there any justification, particularly for a commercial bank to continue financing these high emitting sectors and projects?

Jaclyn Dove: Yes. I guess, as I mentioned earlier, this is a complex situation given the markets that we're in that are most impacted by climate change. In setting an absolute emissions target, we have essentially created a carbon budget for our financing activity within the oil and gas, and fossil fuel sectors. This enables us to make considered choices in supporting our clients in line with our risk appetite.

With a portfolio approach to that lending, what we do in oil and gas sector align with the emissions reduction trajectory that we have set for ourselves, we can support both clients, and the markets at various stages of readiness along their respective journeys towards net-zero, which if you can appreciate across all of these markets, are at varying stages, and not all necessarily aligned.

We also believe that natural gas has an important role to play as part of the global energy transition to net-zero, and as we balance, as you mentioned earlier, the need for energy security, resilience, and affordability alongside sustainability, we'll continue to prioritise green and renewable solutions.

Now it's not easy, but given the diversity across our markets, and the varying stages of that journey, again, going back to your point, in order to help that transition, there will be a role to play in moving the decommissioning of coal areas, but at different paces.

Further to that, within Standard Chartered, we have an environmental social risk management group, and as part of the nine position statements, there are specific guidelines on the restrictions to phase out coal. We've set those guardrails internally, alongside our net-zero emission targets, which is clearly articulating that we will not provide financial services to clients that are either building new thermal coal infrastructure, that are investing in new or additional thermal coal power generating capacity, that are acquiring stand-alone thermal coal power assets, and we will only provide financial services to clients who by 2024 are less than 80% dependent on thermal coal.

Kirsty Haymon: That's great, and I will come back in a moment to that internal process that you need to use to manage and balance those risks. But just coming back again, there's some criticism in the market around banks that are using this as a mechanism to refinance high emitting assets in a less transparent private market. Does Standard have a position on that? What else needs to be done to encourage an understanding of the nuances that are needed to strike that balance in a region with energy security issues?

Jaclyn Dove: Yes, we do, and that goes back to our position statements that I referenced. Again, we have that phased approach that any activity, and particularly the refinancing of new plants, or to refinance in the adoption of renewable, that is reviewed on a case-by-case basis, taken through our group risk committee, and approved or not. We will look at the benefits, and the structure of those financial services provided to those clients, and they do have to adhere to the position statement that we have made.

There will be different levels of maturity for each of our clients. If they can demonstrate that they have a credible transition plan in place, for which we have the opportunity to facilitate that just transition, reduce their overall emissions, and be able to track, and for us, credibly report and disclose against that, we will continue to support that on a case-by-case basis.

We've also, internally within Standard Chartered, brought in the skills and capabilities, decarbonisation experts, clean technology experts as well, so looking at new areas such as hydrogen, carbon capture storage, and being able to advise our clients in that net-zero journey, as well as provide the financial products to assist them in that.

Kirsty Haymon: There's also increasingly collaboration amongst financial institutions that have different drivers to be participating in different ways. Obviously, JBIC has that international development angle that needs to be achieved. Standard Chartered possibly has its own commercial angle as well. What are we seeing in the region in terms of collaboration around blended and concessional financing? What else, if anything, needs to be done to promote that level of collaboration amongst financial institutions?

Jaclyn Dove: From a Standard Chartered perspective, we are one of the largest issuers of Multilateral Investment Guarantee Agency, and we have been for many years. So blended finance in essence isn't really new for us, but we are considering how we now identify and drive it in the areas that are needed most.

I think the good news is that the private sector investors are beginning to mobilise this, and we're seeing a lot of traction. We, at Standard Chartered have also executed around 10 billion worth of blended finance deals over the past four years. This includes 186 million financing that we helped provide for solar plants in Vietnam. We teamed up with the Asian Development Bank to deliver the financing, and for us, it sort of sets a precedent for the successful funding of how a renewable energy project could be executed in the region. Now, once we've done one, the intent is always, how do we scale? How do we replicate across all of our other markets?

Another example of Standard Chartered's involvement to date, particularly to drive the blended finance initiatives is our just energy transition partnerships. We are involved with, again, 11 other participant banks, but really in Vietnam and Indonesia, we are leading the discussions on those partnerships. The intention being to really bridge the gap between developed and developing nations in moving towards clean energy.

Last but not least, during COVID a COVID fund, which again, was a blended finance sort of initiative in essence. We established this fund to distribute nearly 1 billion worth of financing to our clients. Now, what it did was disperse concessional funding at rapid speed to really support a lot of our businesses and societies within our communities to fight COVID-19. The facilities profile really grew pretty fast and rapidly. Governments, regulators increasingly recognised the impact that the facility created within the communities, and I think it demonstrated also once a financial institution can react really quickly, and partner with local communities and regulators, the real positive impact it can have. I think the concessional financing, and blended finance is really going to be the catalyst to help facilitate the sustainability agenda across those markets that need it the most.

Kirsty Haymon: Ryuta, let me come back to you for a moment, because Jaclyn touched on a really important point. Other than just mitigating risks, JBIC's role is also to try and prioritise benefit as an international development bank, so how do you manage this in terms of your internal procedures looking at both additionality, and balancing that out against investing in some of these more risky assets and technologies?

Ryuta Suzuki: Okay. Talking about risk, there could be several types of risks. The first one I would like to mention is political risk or policy change risk, especially for the just transition or energy project, which is the mandatory requirement for public institutions to mitigate those kinds of risk through the policy dialogue with the host country.

If the host country said, "Okay, we should abandon all coal fire or gas fire pipeline next month," all the assets could be stranded assets, which will cause a significant economic loss to the sponsors. To prevent that kind of political risk, while JBIC does not have any concessional loans, we still have a very powerful tool to mitigate the risk associated with the policy change by the host country's government.

The second type of risk I would like to touch upon is technology itself, the hydrogen, use of ammonium, or latest material or equipment, which would be very good for the environment, but of course somebody need to bear with the risk of the technology, or commercial risk of the use of the new technology. So JBIC has already established the special operations to take that kind of new technology risk, and also, we can have the equity investment function to take the risk of the startups.

The last one I would like to mention is related to my current task, to mitigate the risk for the community or society. When we talk about the just transition, we are going to shift from the conventional technology industry to the new one, which is good in the long-term, but through that kind of shift from the conventional technology or industry to the new one, there could be some negative impact to the economy or society. To materialise really sustainable inclusive growth, we have to pay close attention to the community, or people who would be affected by divestment of conventional industrial technology. That could be a challenge not only for the public finance institution, but also private capitals, to pay attention and to ensure that appropriate measures have been taken to protect those vulnerable groups of people.

Kirsty Haymon: I think one of the things that Jaclyn was also mentioning was the due diligence process that financial institutions go through, and I understand JBIC has made some changes around how you're also approaching aspects of human rights, particularly in supply chains but also through covenants in loan agreements. Can you talk us through some of the more substantial changes that have been made over the past few months and years in that space?

Ryuta Suzuki: Yes. We have launched the latest guidelines for the environment protections, the project which JBIC is going to support. The biggest change we made last July is to pay more attention to human rights, especially in the supply chain. So, when we are going to support, let's say the solar panel project or wind turbine projects, we have to make sure that the human rights violation was not there in the supply chain of the procurement of solar panel or wind turbine.

We clearly define in our covenants, in the loan agreement or guarantee agreement, that the borrower or the sponsor needs to pay enough attention, and if it's necessary, they have to conduct the measures to support the affected people. If we find any breach in their promise or covenants, we, of course stop the disbursement, or we ask them to make the mandatory prepayment to protect the affected people or society.

Kirsty Haymon: Jaclyn, turning to Standard Chartered, you mentioned before, there is a huge capacity, and capability gap that financial institutions themselves are grappling with to make sure that we are mitigating risk, but we're also promoting positive outcomes. You mentioned that this was really a fundamental part of your role, so what are you doing internally to try and balance out that understanding and knowledge?

Jaclyn Dove: Thanks, it's a good question. We have a process where that needs to be implemented, the end-to-end process needs to be assessed, and through that process we need to consider any sort of greenwashing risk. We need to ensure that the individuals through that process right from the front end, so our frontline, the bankers, again, providing the financing and advising, our clients are trained, that we have embedded this consideration into our products right through to the credit assessment. So, our credit risk officers having been trained, understanding the potential risks associated to the products, how those are structured, some of them pertaining to new technologies within those sectors.

Then, the second part of when that deal is structured, we also have what is known within the bank empowered approvers, that will review once that facility, whether it's a sustainability linked loan, or use of proceeds loan, has been structured appropriately, with the right covenants in place, and then that it is monitored.

We also have an assurance check that's done. We disclose an impact report on an annual basis, that again shows the impact our financing has had, and that particular report, we have an external company do an assurance check on it to validate that the financing we have provided, the impact that we've disclosed, is in fact matching, or aligned, should I say, to our green and sustainable finance product framework. What's really important is the training. We've recently, as of last week, delivered a sustainability learning programme to all our country CEOs, of which there are 58. We currently have a tiered learning curriculum that's being developed in-house, in partnership with some of our academia partners on a global basis. We continue to look to evolve that programme to ensure that all our colleagues across businesses, and functions across the organisation, in a few years' time will be sustainability fluent.

Kirsty Haymon: Jaclyn, one last question, you mentioned before the role that you're playing, in terms of engaging with your borrowers, with your clients, and bringing them along on this journey, so ensuring that you've got these targets that they need to meet, so you need to be skilled up, but then you also are trying to skill up your clients to understand how they need to adjust their own business models, but also how they also need to not just perceive risk, but also the opportunities that they themselves have to promote this just transition. What else needs to be done in the financial sector to help bring borrowers along on this journey?

Jaclyn Dove: I don't think it's only borrowers, I think it's about how we bring the world on the journey. I know that's seems quite expansive, but there is a requirement for a collective effort, and that collective effort I would categorise in three areas or the three Ps. It's partnerships, platforms, and products, and to enable the financial flow to reach high impact projects, but also for our clients to receive that benefit of that just transition, and this comes to creating any sort of economy.

The public sector is best placed to ensure a good regulatory and business environment, and to help tackle the risks that are difficult to quantify or forecast. While the private sector can often bring additional financing, capacity, technology, the implementation expertise, solutions such as blended finance as we've discussed, when public money is used to spur that private investment into sustainable projects, can and must play an important role.

Lastly, I think investors require standardisation, comparability, and liquid products to be able to buy and sell. Again, we could look at other areas, where we are able to provide that standardisation, and things such as the green bond initiative, loan principles, and we are seeing an emergence of all these frameworks coming out. I think a level of standardisation, and perhaps maybe interoperability between all of them will help that, but from a client's perspective and how they get up to this speed, I think for me it's those three Ps. It's considering the partnerships, the platforms, the products to look at, that will really help transition their businesses.

It is also an education piece. So bringing those all together within Standard Chartered, and the tiered learning curriculum I referenced, really thinking about how we take that learning curriculum out to our clients in their varying stages of maturity on that net-zero journey, and providing that education as to what is sustainable finance, whereabouts in that cycle or journey is your sector or your company, and then how can we, as your trusted advisor and partner, help the financing of that transition. It's really about working together with them in that ecosystem and providing the education and the financing to help them transition.

Kirsty Haymon: Today we’ve heard how financial institutions are adapting their approach to environmental and social risks throughout the portfolio, and also helping to drive positive impacts wherever possible. Most importantly, with their own net zero targets, banks are upskilling internally and externally to drive the behavioural change necessary to phase out support for high emitting assets. Collaboration between public financial institutions and private capital will help to materialise sustainable, inclusive growth and ensure that appropriate measures are taken to protect the most vulnerable.

Over the past five episodes, we’ve navigated the potential opportunities that could underpin the ongoing race to net zero. How and when this is achieved will largely depend on all stakeholders uniting towards common goals, keeping in mind always the impacts on us all from decarbonisation activities, to ensure a just transition, not just a transition. Thanks for listening and stay tuned for further podcasts from PwC’s Asia Pacific Sustainability team.

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