ADDRESSING CLIMATE CHANGE NOW CAN ENHANCE RESILIENCY OF INVESTMENT RETURNS

5 March, 2019

Much of the burden of the global impact of climate change will fall in Asia, as more frequent and more catastrophic weather events exert unparalleled pressure on our cities’ citizens and assets. 

In 2018 alone, Typhoon Mangkhut created widespread destruction and an insurance bill nearly exceeding US$1 billion in China, Hong Kong and Macau, exposing the vulnerability of even the most developed cities. Combined with rapid urbanization and rising sea levels, the impacts of climate change are not only an environmental concern, but are becoming a pressing economic issue.

For a low-lying island country like Singapore, the most immediate threat will come from rising sea levels. As the city-state expands to meet the needs of its growing population, it’s imperative that new infrastructure and buildings are built, managed and operated to be both climate resilient and future-proof. This also means that the resiliency of our built assets, like schools, offices and homes, and the subsequent return on investment of these fixed assets, are vulnerable to the increasing impact of climate change. 

Climate change and rapid urbanization are likely to have the greatest impact on the real estate and infrastructure sectors in Asia. This means the investment community should understand the relationship between an asset and its environment to be able to address the uncertainties around climate risk.

In many ways, Asia is already responding. Some companies in the region are pursuing sustainable finance solutions to help them work towards fulfilling environmental, social and governance (ESG) requirements. However, while this is a step in the right direction, Asian corporations are doing so at a slower pace than their more developed counterparts in North America and Europe. 

By reducing their potential exposure to environmental acute shock and stressors, Asian investors know that they can enhance the certainty of their returns in an increasingly unpredictable world. Without a comprehensive understanding of these risks and opportunities, the likelihood of seeing financially stranded assets and reduced returns will be higher. This means that increased focus and accountability is required from both lenders and investors to maintain target returns and ensure the most sustainable and resilient projects are financed.

The Hong Kong government has implemented a green bond issuance programme with a borrowing ceiling of HK$100 billion to provide funding for green public works projects. Some of the city’s conglomerates, such as Swire Properties and Mass Transit Railway (MTR) are launching or planning their own green bonds – placing increased importance on sustainable finance and reflecting the global surge in Green Bond issuance.

Gone are the days when financial institutions could get away with only loosely embracing ESG. Since 2016, the Singapore Stock Exchange requires listed companies to publish a sustainability report to provide a comprehensive overview of the issuer. A year earlier, the Hong Kong Stock Exchange moved ESG reporting requirements from “recommended and voluntary” to “comply or explain”. 

The trend of sustainable finance in real estate and infrastructure investment is gaining momentum globally. Investors and financial institutions are recognizing the importance of ESG factors in determining and driving the value of an asset. McKinsey stated that over 25% of assets under management globally are being invested on the premise that ESG factors can affect a company’s performance and market value. Financial institutions have also started to acknowledge the need to look beyond the initial mandated tenor and consider the future physical risks of climate change on an asset to identify related financial pitfalls. 

In Asia, the question remains as to whether the investment and asset management communities are ready to respond to climate-related issues. Evidence to suggest that ESG factors are being routinely considered during decision making processes is limited, even though sustainability reporting has significantly increased over recent years. 

However, businesses who only consider ESG reporting are missing a vital part of the equation. In Asian markets, it is expected that the environmental and social impacts of climate change will soon be felt more acutely at the local level. Real estate developments not supported by high-quality local infrastructure, or not designed to withstand extreme weather events such as urban floods or water scarcity will see their value reduce. The impact of the environment on an asset and its long-term resiliency to climate change needs to be fully considered, rather than just its short-term value. 

This changing focus on mitigation, adaptation and climate resilience of an asset needs to become a more integral factor in investment decision making. Ultimately, sustainable development and investment need to reduce an asset’s negative impact on the environment and the community in which it operates, mitigate risks from future events, while generating attractive resilient returns for investors.

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Richard Warburton

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