Engaging Investors: A Conversation With Founder Ben McCarron

Engaging Investors: A Conversation With Founder Ben McCarron

By Ben McCarron 21 August, 2023

McCarron, Founder of ARE, talks to us about his work on harmonizing Asia's banks and the global climate agenda. Are Asia's banks keeping pace with changing expectations?

Asia Research & Engagement (ARE) is a social enterprise working with investors in dialogue with companies to elevate sustainable development in Asia. ARE released two key reports over the last two years looking at the performance of banks in Asia on climate risk management and the other on the opportunities and risks of financing transition technologies. We sat down with Ben McCarron, ARE’s Founder & Managing Director, to hear how these reports were received and what should be priorities for banks in the region. 

CWR: Ben, thanks for sitting down with us. It’s been a little over a year since the release of Asia Research Engagement’s (ARE) report, “Banking Asia’s Future: How to Align with National Climate Plans”, which assessed the approach to climate risk management of 32 leading banks listed in nine major Asian markets. Can you share a few key takeaways and what you wanted to achieve with the report?

Ben McCarron (BM): We wrote the report to support constructive dialogue between the investors we work with and regional banks. The report provides a baseline showing exactly where Asia’s banks stand as they address their practices and seek to align with global climate objectives.

Banks in Asia have not kept pace with changing expectations…

…are mispricing exposure to carbon-intensive assets

As you can imagine, there is a wide range of approaches to climate risk management. Generally, there are two approaches. Banks can set strategies anticipating regulatory or market developments and position themselves to mitigate risks to capital and capitalise on multi-trillion-dollar opportunities. Alternatively, banks can take a reactive approach only shifting practices and relationships as clients face tighter carbon regulation; disruption from cleaner technologies; and the impacts of the changing climate.

Our research shows that to date the region’s banks have not kept pace with changing expectations. Asia’s banks are mispricing exposure to carbon-intensive assets that are increasingly difficult to re-finance or transfer. Without urgent course correction, widespread misallocation of capital will continue, leaving the region vulnerable to correction.

CWR: What has the response to the report been like? Are Banks doing any better? What still needs to be done?

BM: The report was very well received both within the region and internationally with more than 200 publications reviewing the report.

Seeing bifurcation between Asian developed & developing markets

We are clearly seeing a bifurcation between more developed markets, such as Japan and Singapore, and developing markets, like Indonesia and the Philippines.

Developed market banks create robust policies and transition plans driven by stronger regulatory environments and stronger investor engagement. Developing market banks are progressing slowly, but we anticipate the pace will accelerate as they look to match the best practices being established.

CWR: Are there any examples of good practices by banks in the region or internationally?

BM: Yes, there are several Asian banks leading the way in energy transition. The Singapore banks have all launched sectoral decarbonization pathways, which is a positive development. These are strong targets and for them the work now shifts to implementation and a combination of ensuring and supporting clients are setting credible transition plans.

Singapore banks are leading on energy transition

Beyond this:

• DBS is working with the Indonesian government to develop financing structures for the managed phase out of coal plants in Indonesia.
• Mizuho Financial Group put in place a robust transition risk infrastructure centered on client engagement which drives net-zero transition planning and climate-related risk.
• CIMB Group was the first Asian developing market bank to set a policy to stop financing coal and reduce exposure to zero by 2040.

CWR: Given your work with investors, what are their thoughts on how banks are managing climate risk? What are they expecting? Are there any risks they are particularly concerned about?

BM: Broadly, investors want to see banks align their financed emissions to the Paris Agreement, financed emission being the loans and other related products provided to the banks’ customers.

Investors have key expectations in four areas.

• Governance. Bank boards have ultimate oversight of climate change and sustainability issue management – this covers both assessment of related risks and the approach, definitions, and transparency over green and transition frameworks. The board and directors have clear accountability for managing these issues and ready access to necessary expertise.
• Sustainable Finance. Banks disclose their definition of sustainable finance and use an established, external standard. Banks establish and disclose a strategy to scale up sustainable financing activities, including loans, bonds, trade financing, and any other activities to support their clients’ energy transition strategies.
• Policy. Banks set policies for no new financing of fossil fuels. Banks establish targets and emission reductions pathways for all high carbon emissions sectors which are aligned with the Paris Agreement.
• Risk Management. Banks conduct robust scenario analysis for transition risk and physical risk associated with climate change. Banks develop a robust infrastructure to evaluate their customer’s transition strategies and ability to track their customers’ performance. Banks establish a well-defined escalation policy for clients who do not have Paris-aligned transition strategies or are off plan.

CWR: In March this year, ARE launched another report, “Banking on Transition Technologies: Beware of Lock-In Traps”. How does that build on your previous report?

BM: The banks play a critical role in the transition to sustainable energy by providing clients with financial resources to transform their operations from fossil fuels to clean energy sources.

The EU has done a significant amount of work developing taxonomies and guidelines to define which financings are aligned with the Paris Agreement and can be viewed as sustainable.

Asia has started the journey to develop region-focused taxonomies and guidelines—a very difficult task given countries are at different levels of economic development and the level of infrastructure and resources to make the transition to clean energy vary greatly.

The report reviews a guideline released in Sep 2022 by the Asia Transition Finance Group…

The report reviews a guideline released in September 2022 by the Asia Transition Finance Group, Asia Transition Finance Guidelines.

The Asia Transition Finance Group is led by the major Japanese banks. The guideline includes references to research produced by the Economic Research Institute for Asean (ERIA), Technology List and Perspectives for Transition Finance in Asia. ERIA is heavily supported by the Japanese Government.

We largely agree with the general frameworks and approach the document prescribes for evaluating transition financing. However, we are very concerned about the transition technologies recommended for the Power Sector.

…we largely agree with the general frameworks…

…but very concerned about the transition technologies recommended for Power Sector

The recommendations have been influenced by Japanese energy policies promoting technologies that prolong the life of coal fired power plants, co-firing of ammonia, and CCUS.

Despite significant research which questions the economic viability of the technologies and the ability to reduce emissions when viewed on a life cycle emission basis, Japan continues to invest heavily in developing these technologies.

Japanese energy policy was challenged by Canada and others during the G7 Ministers’ Meeting on Climate Energy and the Environment held earlier this year in Sapporo.

The final communique noted the use of co-firing in the power sector should only be pursued towards achieving zero emission thermal power generation which is aligned with a 1.5-degree pathway and a fully or predominately decarbonized power sector by 2035 while avoiding N2O (released in the combustion of ammonia). Reading in between lines, the G7 gives no support to the technologies being promoted by the Japan Energy Policy.

Our report details the technological and economic shortcomings of the transition technologies and risks the banks will have in financing technologies that extend the life of fossil fuel power plants.

CWR: What do you see happening in this space in the short-term? And what do you want to see happen?

BM: There are two key areas banks should focus on to align their operations with the Paris Agreement/1.5 degrees C pathway.

There are 2 key areas banks should focus on to align ops with Paris 1.5 °C agreement

The first priority is for banks to put in place a robust transition risk management infrastructure to monitor their customer’s transition plans.

The infrastructure requires capacity building to understand the risks in their client’s transition plans as well as building the data analytics needed to collect and understand the emission data produced by their clients.

The second priority involves building the knowledge base to properly finance or underwrite the financing of the transition to sustainable energy. There are different concepts including green, sustainability linked, and transition finance that need to be defined.

Transition finance is particularly important in Asia as it is highly dependent on fossil fuels, especially coal + has a young coal power fleet

Transition finance is particularly important in Asia as regional power and energy markets are highly dependent on fossil fuels, particularly coal, so there is a greater need for transition pathways to meet global climate goals.

There needs to be specific support to allow early retirement of high carbon assets, especially Asia’s relatively young coal power fleet. There are several guidelines for Managed phaseout (MPO), but there need to be more example projects to better understand how to create appropriate trade-offs between accelerated closure and low-cost refinancing for such assets.

Further Reading

• Futureproofing APAC Banks & Savings — Find out which 17 major APAC banks are on track of sinking loan books totaling US$7.9trn.
• Narwhale Ventures: Decarbonization of the Ocean Economy — Excited by the crucial role ocean startups play in decarbonizing the blue economy, Schulze co-founded the Narwhale Ventures fund. We sit down to hear more about it and what she’s got in the pipeline
• Asia Needs to be On Board for Global ESG Rule-Setting: IFRS Chair Erkki Liikanen — Being present in all jurisdictions is essential for ISSB to set global climate disclosure baselines. What’s their Asia plans? How well are Asian co’s disclosing GHG emissions? Eco-Business’ Ng expands
• CDP Global Water Report 2022 “Riding the Wave” – Key Takeaways — CDP’s new report reveals billions in potential gains for Southeast Asian companies that disclose water risks. Souza, CDP’s Regional Manager for Water Security, shares more key findings

More on Latest

• Gathering A Rising Tide: 8 Positive Points On Coastal Threat Stress Testing Since Publishing Our Report — Despite climate challenges, we’ve been feeling more positive thanks to the active engagement we’ve had with finance & corporates on our sea level rise report as CWR’s Mirando shares
• All quiet on the ESG Front as Oil Back-Pedals on Net Zero — Greenwashing Alert! So-called climate activist shareholders are loud when oil is waning but silent when profits soar. Are investors just riding the green wave? CWR’s Lam breaks it down
• Investing in Water – No Longer ‘ESG Safe’? 3 Thoughts — Greenwashing risks are on the rise as investing in water is heading for choppy waters, which could leave us up sewage creek. CWR’s Tan shares 3 thoughts on why water investments are not automatically ESG safe, investors take note