This research was commissioned by the Asia Investor Group on Climate Change (AIGCC) to better understand the current state of play for climate finance across the Asia Pacific region, and to gain insight into emerging and future trends for investment and lending activity.

In the first part of the research (p4-p10), current issues related to climate change are discussed. The Asia Pacific is home to a number of leading and emerging economies and will be critical in the global effort to tackle climate change: one of the key challenges in climate change mitigation lies in changes we make to the way that we use energy. Many nations have already begun investing in leading and innovative solutions aimed at reducing emissions and reducing the carbon intensity of economic development.  However, between 2014 and 2035 cumulative investment of USD 4.6 trillion will be required into renewable energy and energy efficiency to meet the energy demand of China, India, Japan, and South-East Asia. This figure needs to rise to USD 7.7 trillion if the world is to meet the 2°C warming target. Total issuance of climate aligned bonds across the Asia Pacific markets we covered of USD 293 billion, and this was heavily concentrated (84%) in China.

The second part of the research (p11-p18) set out to understand the state of play of the finance industry in the Asia Pacific region in relation to climate change. Authors assessed the regulatory drivers and industry initiatives across the major Asia Pacific markets looking at the major domestic and international initiatives. Also, they reviewed the disclosure of leading domestic financial institutions across the Asia Pacific region to understand the state of the finance industry’s response to climate change. 36 banks, 30 investors, and 24 insurers are reviewed for a total of 88 financial institutions after adjusting for double counting.

The performance of the financial sector varies from country to country. In general:

• The low carbon economy presents a multi trillion-dollar financing opportunity for the banks that choose to address it – and more than half of the banks reviewed in this report are doing so. Yet the transition to low carbon activities also requires banks to progressively reallocate capital away from the carbon intensive industries, particularly coal.
• Investors across Asia have taken a more active approach to ownership over the last few years. Large domestic Asian investors have started to publish corporate governance policies relating to their voting and dialogue with investee companies. Regulators have supported this trend, and more than half of the markets covered in this report already have a stewardship code or are in consultation on one. These developments are positive. However, there is less information on specific steps relating to climate change.
• Changing weather patterns are changing the risks of catastrophic events and flooding leading to changing pay out patterns for insurance companies: This could be an opportunity as many provided new innovative products.

Market profile for the investigated 12 countries in Asia are presented in detail in the third part of the research (p19-p30).

1. Sector activity
   Authors found 31% of the institutions stated that they factored climate change risks into their financing operations. The banks, in particular, were more comfortable discussing climate change opportunity than risk: 61% referred to green products and 56% provided some quantification of their exposure. By contrast, only 28% referred to climate change factors as a reason to limit financing, even though 81% disclosed their policy on responsible lending.
2. The Great Transition
   Nations across the Asia Pacific are critical in the global effort to tackle climate change. Many nations across the region are investing in the policy frameworks and commitments necessary to drive investment into climate solutions. The Asia Pacific markets have now started the journey to a sustainable financial system. However, there remains a long way to go.
3. Investment needs
   The investment needed to address climate change is significant. Considering renewable energy and energy efficiency alone, the International Energy Agency (IEA) projects that between 2014 and 2035 cumulative investment of USD 4.6 trillion will be needed to meet the energy demand of China, India, Japan, and South-East Asia. This figure needs to rise to USD 7.7 trillion if the world is to meet the 2° warming target.
4. Market variation
   In general, the markets of Australia, Japan, South Korea, and Taiwan had stronger patterns of disclosure on sustainable finance. However, Chinese banks had strong disclosure on green finance. Progress is being driven by different factors in each market.
5. Climate bonds
   The Climate Bonds Initiative tracks new bond issuance and records whether each bond is aligned with climate goals or specifically labelled as green. Their State of the Market 2016 review found total climate aligned bond issuance of USD 694 billion. Total issuance across the Asia Pacific markets we covered was USD 293.4 billion of which, green-labelled bonds accounted for USD 14.3 billion. China was the leader in climate aligned bonds and its green labelled bond issuance is growing fast.
6. Domestic regulations
   Authors also reviewed regulatory approaches. They found that:
   • Five of the twelve markets have banking initiatives
   • Four have stewardship codes (and a further three have draft codes to promote active ownership at investors); and
   • Five markets include sustainability disclosure within the listing rules of their stock exchanges.
   The domestic support is particularly important as Asian financial institutions have a relatively low representation in international initiatives to support sustainable finance.
7. Listed company disclosure
   In general, the markets of Australia, Japan, South Korea, and Taiwan had stronger patterns of disclosure on sustainable finance. However, Chinese banks had strong disclosure on green finance.
   Progress is being driven by different factors in each market. For example:
   • In China, the banks have moved in response to green credit guidelines from the China Banking Regulatory Commission (CBRC).
   • By contrast, Australian banks have adopted voluntary policies and standards