Financing a Greener Future

On July 5, the British Chamber of Commerce in Japan invited an expert panel to discuss recent developments in environmental, social and governance (ESG) financing, both globally and in Japan, and consider what the future might hold in this fast-growing field. 

Kenji Yamamoto, president and country executive, NatWest Markets Securities Japan Limited, opened the online event by outlining NatWest Group’s commitment to monitoring and managing ESG outcomes, as evidenced by its role as a principal partner of COP26 last year.

Describing the financial sector as the “chief enabler and driver” towards zero carbon emissions, Yamamoto said NatWest Group met its 2020–21 target of providing £20bn of climate and sustainable financing early, prompting the bank to set an ambitious new goal of £100bn of contribution by the end of 2025.

Moderator James Carter, deputy head of trade at the British Embassy Tokyo, shared the UK’s track record “at the forefront of moving financial markets towards greener and more sustainable futures.”

In 2021, the G7 Summit, in Cornwall, and COP26, in Glasgow, both had green finance at the core of their agenda. Specifically, the UK’s G7 presidency saw a commitment to end overseas fossil fuel financing while COP26’s Finance Day mobilised the finance sector towards net zero and climate resilience development, said Carter.

These efforts build on the publication of the British government’s inaugural Green Finance Strategy in 2019 and the launch of the Glasgow Financial Alliance for Net Zero (in April 2021) by UN Special Envoy on Climate Action and Finance Mark Carney. The alliance boasts some 450 members, including leading banks and asset management firms, located in 45 countries and with more than £108trn in financing.

 

Global trends in ESG

Caroline Haas, head of climate and ESG Capital Markets, NatWest Markets, shared the findings of NatWest Group’s 2021 global and Asia-Pacific surveys on ESG.

In the global poll—whose 70 respondents have a combined £15.3trn of assets under management—31% said incorporating ESG would improve the risk-return profile of investments, up from 21% in 2019. The reason is twofold, explained Haas. First, investors across the board, from institutional asset managers to private equity, no longer see ESG as purely philanthropic. Rather, it is good for business. Second, regulations such as the UK Stewardship Code “encourage change and build awareness.”

More respondents (40%) also said they are embedding ESG into general risk factors, up from 14% in 2019. This change is noteworthy given the time, budget and resource required, she said. Moreover, 38% of respondents felt this integration was applied across all investments, regardless of the portfolio the asset would be allocated to.

Only 5% of those surveyed had no ESG policy.

Barriers to further improvement in ESG financing include greenwashing (when a company claims to be environmentally conscious without making notable sustainability efforts) and a lack of standardisation in ESG data.

Most respondents reported having to use many providers to get the ESG data they need for underlying assessments, prompting them to create their own “bespoke scorecards.” Still, Haas expects that investors will have better scoring options once “methodologies get better, the quality of data improves and processes get deeper.”

But she also pointed out a capacity constraint: ESG analysts “cannot be trained fast enough given the number of organisations needing their know-how and expertise.” Respondents employing ESG-only analysts totalled 27% while respondents relying on credit and ESG analysts working together numbered 36%.

 

Japan and ESG

In the Asia-Pacific, Japan is “leading the charge” on ESG, said Haas. Of the Japan-based respondents, 83% have an ESG policy (compared to 67% regionally) and 25% have a fully integrated ESG strategy (compared with 8% regionally). Furthermore, 67% of investors in Japan measure the carbon footprint of investments from operations or the portfolio, compared with 8% of their counterparts in the region.

From a global ESG perspective, Haas said the Asia-Pacific is not as far behind Europe as many perceive, pointing to the 40% of Asia-Pacific respondents who have an ESG strategy. In the global survey, 42% of respondents reported having one.

Asked what is driving Japan’s development in ESG, Satoshi Ikeda, chief sustainable finance officer of Japan’s Financial Services Agency (JFSA), said that more and more senior managers in the financial industry consider ESG to be fundamental to their business decisions.

JFSA’s efforts in improving corporate governance and stewardship, together with the government’s commitment to net zero carbon emissions by 2050, have helped boost this way of thinking and increase adoption of ESG.

Although challenges remain, such as measuring ESG data and preventing greenwashing, the JFSA continues to improve the ESG ecosystem in Japan, Ikeda said, pointing to its establishment of an expert panel on sustainable finance in 2021 to make improvements.

“We’re making progress in disclosures, market regulations and the supervision of financial regulations,” he said, adding that Japanese companies are increasingly integrating environmental issues into their strategic thinking.

 

Tackling carbon offsetting

Bill Gilbert, Innovation Delivery, NatWest Markets, outlined the need for carbon offsetting, such as tree planting, to aid humans’ “transition to a decarbonised economy.” Removing carbon dioxide from the atmosphere, even as the amount of carbon dioxide released decreases, is an important part of the process to reach net zero, he said, adding that the aim should be “to buy less and less carbon credits as we go forward.”

He criticised greenwashing in carbon offsetting—the practice of offsetting emissions through purchase of carbon credits on the voluntary carbon market rather than changing company operations—but recognised any offsetting is a “significant step” for companies today. This is because the practice is still in its early days, without policy or voluntary mandates. Furthermore, many companies are undergoing financial strain as a result of geopolitical issues.

For any corporate seeking to offset emissions using carbon credits, the key deciding factor when choosing from the wide range available is the quality of the projects those credits support.

Carbonplace, a global carbon credit transaction network created by NatWest Group and other global banks in 2021, is one way that people can better make decisions on buying carbon credits, Gilbert said. It offers a simple, secure and transparent transfer of certified carbon credits by allowing people to look directly at the quality of projects.

 

Greener future? 

Reflecting on progress in green financing so far, Haas said behavioural change and the flexibility of the financial world have been—and will continue to be—critical, although she noted that regulators have assisted that process. She said younger generations, in particular, are looking to today’s leaders to drive further change.

Ikeda said investors and corporates in Japan should “think fundamentally about what erodes our current system” and continue “scanning the horizon for other risks” to advance ESG further.

Gilbert welcomed the increased pace of development in the field of ESG in the past two years and reminded attendees why it is so important. He called on individuals—as well as corporations—to each do their bit to ensure a sustainable future.

“The planet is not in danger [from climate change]. It’s been around for 4.5 billion years and has gone through a lot worse,” he said. “What we’re talking about is our ability to sustain the human species. We’re doing great, but we need to take it up a notch.”