The financial services industry plays a vital role in enabling sustainable business practices. No sector can achieve sustainability in isolation. This is particularly true for financial services, as its sustainability progress depends significantly on the performance of its portfolio companies and borrowers. Therefore, it is crucial to monitor the integration of sustainable practices within financial services effectively.
This inaugural Sustainability Counts deep dive explores progress on various sustainability matters by financial institutions across the Asia Pacific region. It leverages the insights drawn from the Sustainability Counts III report and aims to shine a light on the financial services industry, given its strategic importance.
Rather than covering each and every aspect of relevant disclosures reviewed, we aim at drawing out those trends – informed by sustainability reporting – that appeared most significant both to the here and now, but also the future of sustainability.
Scope of this sub-study
This sub-study focuses on 129 listed companies within the financial sector across 14 jurisdictions in the Asia Pacific (APAC) region, namely: Australia, China (Mainland), Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand, Vietnam.
Key highlights
This inaugural deep dive into the sustainability reporting trends of financial institutions across the APAC region gives us seven main observations:
- Environment, social and governance (ESG) SG target setting by financial institutions is widely observed, with net zero commitments currently set by just over half of firms surveyed. However, the use of net zero protocols such as the Science Based Targets initiative (SBTi) to inform targets remains low. This suggests opportunities for increased ambition by financial institutions, which can in turn drive real economy decarbonisation.
- A minority of financial institutions are systematically disclosing information regarding their use of scenario analysis. However, this figure may rise in coming years as regulators have been increasing expectation levels here.
- Of those financial institutions that do disclose how they are using scenario analysis, most are doing so via a combination of qualitative and quantitative approaches.
- Awareness of nature and biodiversity is already at reasonable levels – new initiatives in the field are aimed at increasing private financial flows in support of nature positive outcomes.
- Over half of financial institutions surveyed adopt a double materiality approach to identifying material ESG topics.
- Cybersecurity issues remain front of mind for financial institutions – often over and above more 'traditional' material ESG topics.
- Sustainability reporting assurance is commonplace, with a healthy application of external assurance among firms surveyed.
ESG target setting by financial institutions is widely observed, with net zero commitments currently set by just over half of firms surveyed. However, the use of net zero protocols such as the SBTi to inform targets remains low. This suggests opportunities for increased ambition by financial institutions, which can in turn drive real economy decarbonisation.
* Application of the SBTi Corporate Net Zero Standard in this regard would generally not extend to financed emission target setting.
Source: Sustainability Counts III – The state of sustainability reporting in Asia Pacific: research study conducted by PwC and the Centre for Governance and Sustainability (CGS) at the National University of Singapore (NUS) Business School
Around three quarters of financial institutions have set and disclosed some form of ESG target. However, this number does decrease when net zero commitments are considered, with 52% of financial institutions surveyed having such a target.
Within the Asia Pacific region, we observe that 9 out of the 14 jurisdictions reviewed have set countrywide net zero targets of 2050. China and Indonesia however have set a net zero target of 2060, while India has a net zero target of 2070.
Naturally, financial institutions’ activities and approaches to target setting are not decided in a vacuum. Governmental commitments and policies help set the parameters within which domestic financial institutions and real economy actors operate.
The extent to which we can expect to see an increasing number of 2050 net zero targets in future may therefore depend on the relative ambition levels of the home jurisdiction a financial institution operates in.
Looking beyond the public policy arena, standards developed by the SBTi in the voluntary space are widely seen as representing extremely high integrity in regards private sector decarbonisation targets. Yet, usage of net-zero target setting criteria developed by the SBTi remains the exception rather than the rule across financial institutions reviewed.
Specifically, among firms that have set net zero targets, 17% have done so based on the SBTi’s Corporate Net Zero Standards, while 8% have their net zero targets validated by SBTi. Furthermore, only a small handful of firms using the SBTi’s Corporate Net Zero standards have extended their targets to their financed emissions. The low levels of SBTi alignment (and lower levels still of target validation) can likely be attributed in part to the demanding nature of the SBTi requirements themselves.
It should also be noted that the SBTi itself is developing a new Financial Institution Net Zero (FINZ) standard. As such, it may not be surprising that financial institutions may be adopting a 'wait and see' approach until the new standard is finalised, before making a call on whether SBTi alignment is achievable/desirable for them.
For background, financial institutions looking to align with the SBTi today may use the SBTi Corporate Net Zero Standard to inform operational emissions reduction targets. The current Financial Institution Near Term (FINT) criteria would then also be used as the basis for financed emissions targets.
Moving forward, the SBTi envisages that the new FINZ standard – expected to be finalised during 2025 – will ultimately supersede the FINT criteria.
It should be noted that there are certain areas of overlap between FINT and FINZ – such as the importance attached to policies governing fossil fuel exposure and investee/borrower alignment to net zero goals. As such, select financial institutions may still see value in interrogating the FINT’s criteria today, given the anticipated longevity of certain of them moving forward.
However, taking all factors into consideration, it may remain the case that SBTi alignment remains somewhat muted among APAC financial institutions for the next 12 months.
Key takeaway
Financial institutions must remain aware of their role in both financing decarbonisation of the real economy in their respective jurisdictions and in the region. Setting the right level of ambition can help accelerate financing to transition the real economy.
For those financial institutions still considering SBTi alignment, it appears there is enough overlap between new and emerging SBTi standards for financial institutions to warrant engagement with the protocol in the near term, from interested parties.
A minority of financial institutions are systematically disclosing information regarding their use of scenario analysis. However, this figure may rise in coming years as regulators have been increasing expectation levels here.
Source: Sustainability Counts III – The state of sustainability reporting in Asia Pacific: research study conducted by PwC and the Centre for Governance and Sustainability (CGS) at the National University of Singapore (NUS) Business School
The use of scenario analysis has emerged as a key pillar of a comprehensive approach to environmental risk management by corporates and financial institutions. However, only around a quarter of firms surveyed as part of this exercise are currently engaging with the practice of using both quantitative and qualitative methods, as per their public disclosures.
This number can be expected to rise in the near term, considering increasing expectations from regulators on financial institutions regarding the use of scenario analysis.
For example, the Hong Kong Monetary Authority’s Supervisory Policy Manual Module GS-1 states that authorised (financial) institutions are expected to use climate-focused scenario analysis in managing their climate risk. While in New Zealand, the Financial Markets Authority last year released its Scenario Analysis Information Sheet. This contains details to help climate (financial) reporting entities meet their obligations – to undertake scenario analysis and disclose how the process was conducted – under the Climate-Related Disclosures regime.
Key takeaway
Reviewing a financial institution’s familiarity with and capacity for climate scenario analysis is a prudent move – considering ongoing financial regulatory developments and the usefulness of climate scenario analysis. Climate scenario analysis should not be seen as 'just a paper exercise' but as a means to fully interrogate the resilience of the financial institution.
Of those financial institutions that do disclose how they are using scenario analysis, most are doing so via a combination of qualitative and quantitative approaches.
While SBTi alignment remains uncommon among financial institutions, so too is the appearance of firms using both quantitative and qualitative approaches to scenario analysis.
The relatively low usage levels here may not reflect the full picture, however – for example, more firms than those recorded may have used quantitative approaches to scenario analysis but may not feel sufficiently confident when it comes to disclosure. This is understandable, given the scrutiny likely applied to such disclosures.
However, the figure above may also reflect the inherent difficulties in actually applying a quantitative approach to scenario analysis. But what does 'quantitative approach' mean in practice? To give one example, the Monetary Authority of Singapore’s 2020 Guidelines on Environmental Risk Management for Banks state that such measures may extend to 'the use of statistical models to determine the frequency of flooding events, or the use of modified economic models to estimate economic or financial impact.'1
Yet, even where there is clarity around what quantitative measures might entail, potentially limited data availability, measurement uncertainly, lack of skills, capabilities and resources, and in certain cases, sensitivity, may be making the prospect of conducting quantitative assessments challenging.
Perhaps in recognition of this, the Singaporean financial regulator went on to clarify two years later, in 2022, that 'a bank new to scenario analysis may consider starting with qualitative scenario narratives to explore the potential range of implications. As it gains more experience, it can then consider using quantitative information to describe the potential outcomes and enhance the rigour of its exercises.'2
This same incremental approach is also recommended by Japan’s Ministry of Environment via its guidance regarding scenario analysis adoption in the context of Task Force on Climate-Related Financial Disclosures (TCFD) recommendations.3 In Australia, by comparison the domestic financial regulator references The (local) Corporations Act which requires scenario analysis be carried out in line with two temperature forecasts. A 1.5-degree scenario and one 'well exceeding' 2 degrees.
Considering the increasing salience of scenario analysis, a phased approach to implementation, in line with multiple regulatory guidelines appears reasonable. This may take the form of performing qualitative assessments before adopting a quantitative approach and/running pilot assessments on a selected coverage of assets before expanding the scope to include an entire portfolio.
If this recommendation is carried through in the form of industry practice, we can expect the 23% number recorded in this Sustainability Counts III deep dive to increase in forthcoming years. Especially as the scale and frequency of extreme weather events may yet increase – which in turn warrants a more sophisticated understanding of their potential impacts on financial activity.
Key takeaway
Quantitative approaches to climate scenario analysis may seem challenging – but an incremental approach, starting with a qualitative view before elevating your approach to include a quantitative element can make the process more manageable.
Awareness of nature and biodiversity is already at reasonable levels – new initiatives in the field are aimed at increasing private financial flows in support of nature positive outcomes.
Source: Sustainability Counts III – The state of sustainability reporting in Asia Pacific: research study conducted by PwC and the Centre for Governance and Sustainability (CGS) at the National University of Singapore (NUS) Business School
While nearly 50% of financial institutions have a dedicated section on nature and biodiversity in their sustainability report, engagement with the emerging standards from the Taskforce on Nature-related Financial Disclosures (TNFD) remains more nascent.
This is perhaps to be expected, given the TNFD only released its final recommendations in September 2023. Since then, however there have been further developments that may help catalyse engagement among financial institutions with the nature and biodiversity imperative. For example, the International Sustainability Standards Board is working on nature-related standard setting and research drawing on the recommendations of the TNFD.4
Also, at the 'COP16' conference taking place during October 2024, in Cali, Colombia two publications of note for financial institutions were released:
- A discussion paper from the TNFD on nature transition plans5
- A consultation paper on Nature in net-zero transition plans by the Glasgow Financial Alliance for Net Zero (GFANZ)6
In a sense, the arrival of these papers reflects the view of the TNFD – and GFANZ – that nature and biodiversity elements are not sufficiently accounted for by firms using existing transition planning guidelines, not least GFANZ’s own Net Zero Transition Plan framework.
It will be important to monitor the extent to which TNFD-aligned disclosures by financial institutions, where they are forthcoming, may in turn catalyse greater integration of nature and biodiversity factors within strategic business planning processes. This may come, either in the form of new, nature-specific transition plans, or more holistic (climate) transition plans that account for nature-specific aspects more fully.
The importance of addressing nature and biodiversity was highlighted in a recent paper, jointly authored by the Asia Investors Group on Climate Change (AIGCC) and PwC China. Among other key findings, it showed that 53% of Asia Pacific’s economic gross value added was moderately or highly dependent on nature.7 This puts current levels of biodiversity financial flows in sharp focus. Bloomberg New Energy Finance estimates that these currently amount to 'approximately $208 billion per year [as of October 2024], up from our estimates of $166 billion in 2021. A five-fold increase is needed by 2030 to hit the $1.15 trillion needed.'8
Key takeaway
Transition planning requirements incoming in certain jurisdictions for financial institutions present an ideal opportunity to grip nature and climate in one bound.
Over half of financial institutions surveyed adopt a double materiality approach to identifying material ESG topics.
Among companies from the financial industry that have identified material ESG factors as part of their sustainability reporting process, most (54%) have adopted a double materiality approach.
A similar percentage of companies have adopted impact (12%) and financial (16%) materiality approach, typically associated with the Global Reporting Initiative, and International Sustainability Standards Board respectively.
Considering that using a double materiality approach to sustainability is not necessarily mandated, the number of firms surveyed using it suggests financial institutions are increasingly convinced that this approach provides a more holistic understanding of sustainability risks and opportunities.
Key takeaway
Double materiality assessments remain an effective means of informing a more holistic understanding of sustainability risks and opportunities.
Cybersecurity issues remain front of mind for financial institutions – often over and above more 'traditional' material ESG topics.
Source: Sustainability Counts III – The state of sustainability reporting in Asia Pacific: research study conducted by PwC and the Centre for Governance and Sustainability (CGS) at the National University of Singapore (NUS) Business School
The material ESG topic that features most prominently within reviewed financial institutions’ sustainability reports is 'Cybersecurity/data protection/customer privacy'.
This tallies with practical experience of the market. Whether an 'inside-out' approach (i.e., reviewing the effect one’s activities have on the world around us) or 'outside in' approach (i.e., reviewing the extent to which sustainability-related activities around us affect our financials) is used, cybersecurity issues (or a variation of this theme) feature prominently in reporting.
Why is this? First, should they occur the gravity of regulatory sanctions and associated reputational issues arising from cybersecurity issues can be extensive (outside-in impact). Second, their presence can lead to significant costs for and damage to clients (inside-out impact). Considering these factors together suggests those financial institutions adopting a double materiality approach to sustainability reporting9 (i.e., evaluating both outside-in and inside-out impact) will likely maintain a prominent focus on cybersecurity, given its salience across both impact and financial vectors.
Looking beyond cybersecurity, 'emissions' and 'climate change' are the next most frequently cited material topics. To many observers, these may seem like more familiar sustainability topics when compared with cybersecurity. As such, their prominence is not surprising, given the extent to which corporate emissions are being financed by (and attributed to) the sector, and how the value of assets and investments are increasingly exposed to climate risk.
Finally, looking beyond environmental issues, the presence of the 'local community' topic suggests financial institutions remain cognisant of the 'social' dimension of sustainability. As double materiality increases in use, we will look to monitor how prominent this topic remains – considering its presence in sustainability reports is likely predicated more on impact, rather than financial materiality.
Key takeaway
Cybersecurity concerns are likely to remain a key focus for financial institutions, irrespective of which approach to materiality is used to identify risks and opportunities.
Sustainability reporting assurance is commonplace, with a healthy application of external assurance among firms surveyed.
Source: Sustainability Counts III – The state of sustainability reporting in Asia Pacific: research study conducted by PwC and the Centre for Governance and Sustainability (CGS) at the National University of Singapore (NUS) Business School
A clear majority (64%) of financial institutions reviewed have sought external assurance for their sustainability report, while most of the remainder (35%) have performed internal assurance of their report.
Among those financial institutions that have sought external assurance, a majority (93%) have opted for limited/moderate assurance while 16% have done a reasonable/high external assurance.
Among those that have sought external assurance, 69% have referred to ASAE/ISAE/SSAE 3000 as their assurance standards, followed by 36% referring to AA 1000, 25% referring to ASAE/ISAE/SSAE 3410, 23% referring to ISO 14064 and 4% referred to ISSA 5000.
Key takeaways
External assurance continues to provide a clear means with which to ensure the integrity of sustainability reporting disclosures – market trends bear this out.
In conclusion
Sustainability reporting trends within financial institutions shed light not only on what is material now, but on what is likely to emerge in future. While systematic use of scenario analysis, SBTi engagement, and fulsome integration and disclosure of nature and biodiversity issues may remain limited today, there is reason to believe their salience will increase soon. Forward-thinking financial institutions may seek to engage these topics now, as an effective means of preparing for what will arrive tomorrow.
References
1 MAS Guidelines on Environmental Risk Management (Banks)
2 MAS Information Paper on Environmental Risk Management (Banks)
3 METI Practical Guide for Scenario Analysis in line with the TCFD recommendations 3rd edition
4 IFRS: ISSB to commence research projects about risks and opportunities related to nature and human capital
5 TNFD: Discussion paper on Nature transition plans
6 GFANZ: Nature in Net Zero Transition Plans
7 AIGCC & PwC: Nature a Tipping Point
8 BNEF: Biodiversity Finance Factbook
9 29% of 117 financial institutions reviewed as part of the most recent PwC Corporate Sustainability Reporting Directive (CSRD) Survey 2024 were basing their sustainability reports on double materiality
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