[2021 Asia Finance Forum] Ben Caldecott: "Sustainable Finance is a Coexistence of Opportunities and Risks"

"Financial products must incorporate funding to enable companies to secure capital for ESG management"

[Asia Economy Reporter Sunmi Park] "Sustainable finance brings both opportunities and risks. To meet the Paris Agreement target of limiting global temperature rise to 1.5 degrees Celsius, an additional investment of approximately $1.5 trillion beyond current levels is needed by 2050. While this presents an opportunity for the financial industry, climate risks are challenges that the financial sector must address."

On the 25th, Professor Ben Caldecott of the University of Oxford in the UK delivered a keynote speech titled "Sustainable Finance: Drivers and Future Directions" at the 10th 2021 Seoul Asia Finance Forum hosted by Asia Economy. He explained why the financial industry must focus on ESG (Environmental, Social, and Governance) management and which areas require attention for sustainable finance.

Professor Caldecott, founder and chair of Oxford University's Sustainable Finance program, is recognized as a leading global authority on green finance. He serves as the founding chair and chief investigator at the Green Finance Institute (CGF), established by the UK?host of the upcoming UN Climate Summit in November?to adopt and utilize climate environment data and analytical research.

Generally, the industry defines sustainable finance as integrating ESG principles into investment strategies. When companies adhere to ESG principles, they can pursue social benefits. Recently, the recognition that ESG management positively impacts companies' long-term profitability has spread domestically and internationally, increasing the demand for sustainable finance.

Professor Caldecott first addressed the opportunities brought by sustainable finance, stating, "To keep global temperature rise within 1.5 degrees Celsius as per the Paris Agreement, an additional investment of about $1.5 trillion beyond current levels is required by 2050. The enormous capital demand arising from this will be an opportunity for asset management-related financial services."

However, he also noted significant risks that the financial industry must respond to. A representative risk is climate change-related financial risk, which is broadly divided into physical risk and transition risk. Physical risk refers to risks that spread to the financial sector through transactions such as insurance and loans due to physical damage in the real economy caused by abnormal weather events.

Examples include risks where flooding or fires caused by abnormal weather reduce the value of collateral assets, or frequent climate anomalies deteriorate the national economic base, causing government bond prices to fall. Transition risk includes increased default and loss rates due to reduced debt repayment capacity of high-carbon companies, sharp declines in the value of stocks and bonds issued by fossil fuel producers, and reputational risks related to climate change responses among financial institutions' clients and other stakeholders.

Professor Caldecott explained, "The future we envision is a society where physical and transition risks coexist. The scope of climate risk impacts includes not only companies within affected industries but also asset managers, banks, insurance companies, central banks, and governments. Therefore, it is a problem that requires collective efforts."

He added, "In fact, the Bank of England (BOE), the UK's central bank, added climate change-related risk measurement items to its stress tests (soundness assessments) conducted on domestic financial institutions last year. Global reporting initiatives such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Bank for International Settlements (BIS), and Climate Disclosure Standards Board (CDSB) have also entered the ESG ecosystem."

Furthermore, he shared, "According to a survey conducted by the CFA Institute, a global association of investment professionals, 89% of institutional investors responded that ESG should be considered for sustainable long-term returns. Additionally, 73% of respondents are already considering ESG issues in investment analysis and decision-making."

So, how should the financial industry set the future direction for sustainable finance?

Professor Caldecott emphasized the role of the financial sector in helping companies secure funding needed during their transition to environmentally friendly businesses.

He gave an example of a conditional financial product: "If a company reduces its energy consumption by a certain amount next year, the loan interest rate will be reduced accordingly." He explained, "In this case, the company's energy consumption reduction directly translates into reduced credit risk. The financial sector should design such 'win-win structures' into financial products." He also advised, "Collaboration between geographic/spatial data and finance is essential to measure asset locations and climate change risks, so these should be utilized."

This content was produced with the assistance of AI translation services.