How the financial sector can spur the industrial economy's green transition

The Global Carbon Budget 2022 found few signs that carbon emissions are declining and warned that, at current emissions levels, there is a 50% likelihood that global warming would surpass 1.5°C in nine years. As global climate policies stray from their targets, reductions in emissions have fallen short of expectations. In the next 5-10 years, the issue of climate change will further bubble to the surface and cause greater economic disruptions and social unrest.

The COVID-19 pandemic was a stark reminder that humanity needs to respect our need to co-exist with nature. It has made the road to global sustainability bumpier and more challenging, and we urgently need solutions to deal with serious climate-related shocks and crises.

Climate finance, which was highlighted at the recently concluded COP27, is part of the answer. Targeted financing can help countries or companies lower carbon emissions, deal with the ravages of climate change and strengthen climate adaptation and resilience, reflecting the financial sector's pivotal role in addressing climate-related issues. It needs to take advantage of its use and the channelling of funds to stimulate corporate energy transitions while being prepared to meet the social needs arising from such transitions.

Given that the financial sector lies at the front of the industrial value chain, it should set and apply responsible finance guidelines that help mitigate adverse environmental practices and use its financial influence to expedite the value chain’s transition to sustainability. To promote those goals and operate more sustainably, in 2022, Fubon Financial Holdings became the first local company to fully adopt the World Economic Forum’s Stakeholder Capitalism Metrics (SCM) framework and implement its four pillars, aligning itself more closely with international benchmark companies.

Here is how Fubon has put into practice each of the four pillars:

In the wake of COP26, many countries began moving toward net zero. A critical cog of this framework is corporate governance, which is needed to strengthen low-carbon and green energy policies in line with the expectations of investors, regulatory agencies and the wider society. The financial sector has come under pressure to lead supply chains to establish climate governance structures and solidify related management mechanisms. It should also prioritize net zero goals and carbon neutrality when setting climate governance policies and building a risk management culture.

At Fubon Financial Holdings, we fully expect to become a model for sustainability governance within the industry. In 2022, we joined the Renewable Energy 100 group and pledged to use only green energy at all Fubon locations worldwide by 2040. Commitments, of course, need to be more than just slogans, and we have used science-based targets to lay out a decarbonization pathway and long-term carbon reduction goals, including the goal of cutting emissions by 42% by 2030.

As climate change risk takes on greater importance, establishing a comprehensive and practical policy on the disclosure of climate-related financial information is essential. Such a policy should include taking inventory of business dealings with high and low-carbon industries and conducting scenario analyses to strengthen climate risk resilience and lower or diversify the risk of a major impact.

Fubon has found that in Southeast Asia, floods are the most likely form of climate disaster and can have the biggest financial impact on our mortgage and property insurance businesses. Given those realities, we conduct flood hazard identification and risk assessments based on the locations of the mortgage collateral we hold and the properties we insure.

In addition, the financial sector can capitalize on its financial influence to drive industrial change. In dealing with high-carbon industries, some financial institutions are devising “decarbonization” policies and applying them to their investment, loan and underwriting businesses, establishing clear thresholds and feasible timelines to lay out carbon reduction pathways. Others have set rules for investing in or pulling investment out of high-carbon industries and halting new investments or loans in these sectors unless they are clearly targeted at transitioning to green energy. These approaches can encourage high-carbon emitters to invest in carbon reduction and use or develop renewable energy equipment.

As companies try to expedite their energy transitions, they also need to pay attention to the fairness of those transitions and account for the interests of their workers and peripheral stakeholders. Financial institutions can play a critical role in this process. In 2022, for example, Taipei Fubon Bank and AUO Corporation set up first Sustainable Supply Chain Finance (SSCF) initiative. After AUO selected appropriate suppliers and established sustainability indicators, qualifying suppliers could obtain loans at preferential rates or tailored financing solutions from the bank. Those incentives, including stable financial support, have helped AUO suppliers move toward their sustainability transition goals.

Considering its core competencies, the financial sector has a responsibility to develop products and services consistent with sustainable finance principles. Sustainability-linked loans, which have shown consistent growth in recent years, are one such option. Unlike standard loans, their interest rates are structured to incentivise borrowers to pursue sustainable practices. In 2021, Fubon pioneered the first sustainability-linked loan by a local bank (to Merry Electronics). It linked rates to carbon emission and energy consumption goals helping the client advance its ESG policies and net-zero transition.

As our planet’s survival comes under increasing threat from the high-carbon economy, the financial sector should also step up its backing for the green energy sector. Fubon has set up a “Green Energy Insurance Task Force” dedicated to the wind and solar power industries, contributing to the rise of a renewable energy development ecosystem.

SCM is more than a sustainability framework; it represents an operating philosophy. Financial services have always been seen as a form of insurance protecting people and property. But for them to also strengthen the social security net, new products and services need to be developed, and personal and social wealth management services must be strengthened. At the same time, investments and loans can be used to spur and support long-term social and industrial development.

In this era of climate urgency, nobody can sit on the sidelines, and the financial sector has an even greater obligation to bring about change, using tangible actions to get industries to respond positively to sustainability initiatives and find a way to keep the Earth healthy.