Asia Pacific Financial Institutions Struggle to Cope with High Ambition Climate Targets, Finds PwC Report
Only 17 percent of the Asia Pacific’s financial institutions have achieved a ‘credible’ commitment to reaching net-zero emissions as just 52% of the regional financial institutions pledged to hit net-zero by a date yet only 17 percent have actually been able to align their efforts to meet the Science Based Targets initiative’s rigorous standards, found a new report from PwC.
PwC report, Sustainability Counts III – Financial Services Deep Dive, analyzed the disclosures of 129 listed financial firms in 14 APAC jurisdictions that cover India. The report shows a slow pace of SBTi guidelines adoption caused by demanding standards and the uncertainty of the emerging climate protocols. This SBTi is the most acknowledged framework for the setting of climate goals in keeping with efforts that limit temperature increase to well below 2 degrees Celsius above pre-industrial levels. Many financial institutions in the APAC face such tight standards, while only a handful of firms go beyond setting targets for the emissions of the activities that they finance.
One of the most important issues is that there is no standardized validation process that has created controversies regarding the credibility of the climate targets set by many institutions. With an increasing demand for more aggressive climate goals, financial institutions will be forced to implement more solid and transparent practices to ensure that they are truly contributing to the global decarbonization effort.
Scenario Analysis: An Underexploited Critical Tool
One of the issues raised in the report was the lack of application of scenario analysis, a tool crucial in analyzing climate risks. From the study, only 23% of the financial institutions were applying qualitative and quantitative scenario analysis to evaluate their investments, assets, and operations about potential impacts brought about by climate change.
This requires scenario analysis, modeling various plausible future scenarios-for example, global warming or significant changes in policy-to see how such developments might influence financial performance. The report concludes that, although the adoption of scenario analysis remains low today, it might accelerate in the near term, depending on intensifying regulatory pressures.
Other countries, including Hong Kong, New Zealand, and Japan, have already put the imperative for the usage of this scenario analysis tool in financial regulatory requirements. Using this particular set of regulatory expectations, pressures in applying the tool that has risen concerning assessing the region’s climate resilience of their financial institutions.
It warns that scenario analysis should not be mistaken as a “paper exercise,” but the only way fully to understand the resilience of financial institutions with regard to climate change.
Biodiversity and Nature: The Next Big Challenge
Biodiversity and nature-related risks are emerging as a critical aspect of sustainability reporting. While nearly 50% of financial institutions in the region include biodiversity in their sustainability reports, engagement with newer frameworks, such as the Taskforce on Nature-related Financial Disclosures (TNFD), remains limited.
The TNFD has made its final recommendations available as of September 2023. This body sets standards for the evaluation and disclosure of nature-related risks to organizations. Many financial institutions, however, remain at an early adoption phase concerning these frameworks. The report shows that some of the incoming developments in the nature and biodiversity space, such as new papers by the TNFD and Glasgow Financial Alliance for Net Zero, will help foster more involvement from financial institutions.
This highlighted that financial institutions need to be more integrated with nature and biodiversity considerations in their climate strategies. The call was made at the 2024 United Nations Biodiversity Conference in Colombia. Experts attending the conference said that the existing guidelines on transition planning pay too little attention to nature-related risks, which are likely to become a much bigger problem for financial firms in the future.
Assurance and Accountability: The Road to Transparency
The report further reveals that ever more financial institutions are demanding assurance externally for their sustainability reports. In fact, as much as 65% of the institutions have opted for the same, which is growing in commitment to transparency in ESG reporting. Amongst those seeking external assurance, 93% have preferred limited assurance, while 16% have opted for more stringent reasonable/high external assurance.
While a preference for limited assurance would suggest that many institutions are still in the early stages of robust reporting, it is where the demand for transparency in sustainability practices begins to grow. The need for sound and reliable ESG reporting will continue to increase as the pressure from regulations escalates.
With stronger regulatory requirements on sustainability disclosure worldwide, financial institutions embracing higher levels of assurance and transparency will thus be better positioned to successfully navigate the forthcoming complexities.
Looking Ahead: Challenges and Opportunities
In summary, based on the PwC report, even though the APAC region’s financial institutions will have to address several severe challenges in achieving quite stern climate standards, the willing adopters of such challenges shall be better prepared for their dynamic regulatory and market surroundings. The future of the financial sector in this region will be shaped more by rising attention to net-zero emissions, scenario analysis, biodiversity, and assurance.
As the demand from regulators, investors, and consumers to move on climate action grows in the coming years, that would intensify pressure on APAC’s financial institutions to pick the pace to attain the universal goals of sustainability. Thereby, these years prove a very critical period that the firms have to get acclimated to the shifting climate standards and to consume the newly implemented frameworks within the business models. It is a great leadership role, which has climate and nature-related disclosures, allowing APAC financial institutions to catalyze a transition towards a more sustainable and resilient economy for the region.
Source: ESG TIMES