“Climate finance across debt and equity capital markets, syndicated and bilateral lending, project finance, structured products, derivatives and securities finance represents an estimated global revenue pool of more than US$25 billion annually over the next decade.”
Green financing will play an increasingly important role in global investment in the coming years, and Malaysia can play a pivotal part in this journey.
A report from Boston Consulting Group (BCG) and the Global Finance Markets Association (GFMA) titled “Climate Finance Markets and the Real Economy” describes a significant US$3 trillion (RM12.3 trillion) to US$5 trillion annual financing need and opportunity for financial institutions.
The report features proprietary analysis of the climate finance market and 10 economic sectors that account for 75% of global greenhouse gas emissions. Commissioned and produced in collaboration with 13 global banking and capital markets firms, this research is based on interviews with more than 100 market participants from a range of corporate sectors, banks, asset owners and managers, multilateral organisations, financial regulators and other key market enablers.
The green financing opportunity
This global shift unlocks a substantial financing opportunity that is essential in meeting the commitments of the Paris climate agreement, mitigating excess carbon emissions and avoiding the worst impacts of climate change.
The combined financing requirement for this global climate pathway will be between US$100 trillion and US$150 trillion over the next three decades. Climate finance will need to scale across all asset classes, with financing raised across a range of instruments — with estimates in the range of 35% in equity, 44% in loans and 21% in bonds.
This will require rapid scale in asset classes such as equity, structured finance and bank-intermediated lending, while connecting climate-related metrics and outcomes to key market activities such as derivatives and securities lending.
Such a seismic shift will not only provide a valuable opportunity for banking and capital markets to steer positive change but also create new revenue opportunities.
Climate finance across debt and equity capital markets, syndicated and bilateral lending, project finance, structured products, derivatives and securities finance represents an estimated global revenue pool of more than US$25 billion annually over the next decade.
Leading global banking and capital markets firms will play a critical role as lenders, book runners, arrangers, asset managers and investors. These stakeholders have stated a combined ambition to add US$250 million to US$1 billion to their revenue pools up to 2030.
Asia’s significant investment needs
The report reveals Asia’s rapid growth will generate the greatest need for financing, estimated at US$66 trillion, equal to about 55% of the global total. This is driven by the scale and pace of the region’s economic growth, expanding populations, increasing urbanisation and rapid industrialisation.
Loans are likely to form the greatest investment need in the region, at almost half (47%) of Asia’s climate-positive investment needs. Equity (37%) and bonds (16%) will make up the remaining shortfall.
Power, responsible for about 30% of total global emissions, will require transformation investment of roughly US$59 trillion, with over half (US$34.3 trillion) of that global investment concentrated in Asia. The region’s cement industry will require another US$1 trillion, aviation US$2 trillion, light road transport US$1.6 trillion and heavy road transport US$9.9 trillion, with the greatest global share of investment needs by sector all focused in Asia. Chemicals, shipping, agriculture, iron and steel, and buildings are all sectors that echo this trend.
Malaysia could play a pivotal role in climate finance
Asia is by far the region of greatest investment need, and Malaysia could play a key role in driving forward this transition through its financial structures and initiatives.
In 2019, Bank Negara Malaysia issued a pioneering paper entitled “Climate Change and Principle-based Taxonomy”, setting out a pathway towards green-focused investments. Malaysia has demonstrated further leadership among peers, driving creation of a 2020 report entitled “The Roles of Asean Central Banks in Managing Climate and Environment-related Risks”, outlining the implications of a low-carbon economic transition.
The Joint Committee on Climate Change (JC3) led by Bank Negara and the Securities Commission has also been progressive in areas such as disclosure requirements. There is a move in Malaysia towards an industry-wide adoption of Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations.
Countries such as the UK have made similar disclosures mandatory for many organisations. Comprehensive disclosure of climate-related financial information by financial institutions will drive greater transparency on climate risks and provide impetus for positive action on climate through the finance industry.
Efforts are also underway to ensure bank financing reflects a value-based approach that considers people, planet and prosperity. Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF) guidelines were introduced in 2019 to inform financing decisions, with sectoral guides on key industries such as palm oil, renewable energy and energy efficiency.
A further key area of influence comes from Malaysia’s strong Islamic finance foundations. Islamic finance represents around 40% of domestic financing, and the nation is also a leading global hub for shariah-compliant finance. Not only is Malaysia the biggest Islamic finance market in Southeast Asia, but it is also the world’s largest sukuk issuer, and a leader in Islamic fund assets under management with an estimated one-third of total global share.
Implementing progressive initiatives will be a key driver for Malaysia to unlock climate finance potential in the country and the region.
Overcoming climate capital challenges
It is clear that meeting these significant investment needs will not be without challenges. The most evident is the need to rapidly accelerate and mobilise climate financing, growing from US$600 billion today to the potential US$150 trillion required.
Establishing and aligning taxonomic definitions and regulatory frameworks represents another key challenge. Aligning definitions and principles will be critical in assessing the climate-positive value of a potential investment, reducing transaction costs and steering capital flows in the most impactful way.
This alignment reflects another difficulty around reporting, and how companies maintain existing financial reporting standards alongside more long-term climate-related reporting.
What will it take to win in this space?
The global energy transition reflects a growing pressure and opportunity for green financing. In navigating this transition, we have identified 10 key actions for banks and capital markets firms to undertake:
• Partner with and support your clients as a strategic adviser to help them navigate the climate transition landscape and transition pathways;
• Mobilise new sources of patient, high-risk capital to meet the transition needs of your clients, while partnering with research labs to foster climate-focused innovation companies;
• Develop appropriate products and deploy capital aligned with climate transition finance (not limited to green only);
• Refresh your sector and client strategy through a climate lens;
• Mobilise collaboration with the public sector, social sector and standard-setting bodies;
• Scale the use of pooling and securitisation while developing suitable derivative markets;
• Establish a robust product suite and market for derivatives and structured products;
• Integrate climate into risk management and move towards quantitative assessments;
• Build a robust climate data and technology platform to support strategic decision-making; and
• Embed climate risk management into your governance framework and operating model.
Climate financing is set to become a US$100 trillion-to-US$150 trillion market over the next three decades. At the same time, external pricing factors such as carbon prices will increasingly influence investment decisions.
With its pioneering approach to green financing, combined with influential Islamic financing foundations, Malaysia could be playing an important role in supporting this global transition.
Dave Sivaprasad is managing director and partner, and SEA leader for climate action at Boston Consulting Group. Ching-Fong Ong is managing director and senior partner, SEA leader for DigitalBCG and head of Malaysia public sector practice at Boston Consulting Group.