Developing Asia appears to be trailing the more developed countries on the road to net zero carbon emissions, but it has now become obvious that the region, with its unique conditions and needs, has to beat its own path towards the same goal.
Until recently, a myth has prevailed that Asia is not that serious in its efforts to combat climate change and its methods of dealing with the challenge are of poorer quality when compared with those employed by developed countries.
This perception is changing. Perhaps it’s due to a combination of pragmatism, experience, science and the disappointing results of COP27. However, major banks and financial institutions are realizing that developing Asia needs to set its own path to achieving net zero instead of just blindly following the lead of the more developed Western countries.
With this comes the realization that the key to getting the job done is using an approach that takes into account the varying requirements of different countries in the region. It must also be credible and enlightening to the banks and corporates covered by this approach.
The approach, known as the “regional pathway”, is based on the climate scenarios of the Network for Greening the Financial System (NGFS), a group of 91 central banks, banking supervisors and 14 observers that are committed to sharing best practices that contribute to the development of climate and environment-related risk management.
Although similar in many aspects to the “global pathway”, which provides for a more general approach to net zero that is often more suitable to developed countries, the regional pathway provides information and data that are more tailored to the conditions and requirements of specific countries in developing Asia.
In simple terms, the global pathway advocates a one-size-fits-all approach that can be suitable for the more developed regions, such as Europe, where countries are more homogeneous, while the regional pathway can be more suitable for regions that are more heterogeneous such as Asia and Africa.
Pros and cons
This means that an entity that chooses the global pathway will be bound by the global net-zero targets, while an entity taking the regional pathway may have more flexibility in setting its own targets based on its specific requirements.
There are obviously pros and cons for each approach, and deciding which one to use can be a challenging process for any bank or institution since each one will have different targets, portfolios and circumstances.
At present, there is a divergence of opinion with regard to the two approaches among Asian banks and institutions that are attempting to build their own pathway to achieving their net-zero targets.
For example, DBS, which is a major regional bank based in Singapore, has adopted the global pathway approach, while its peer, UOB, has chosen the regional pathway approach.
In Malaysia, CIMB and Maybank also appear to have done some work that is consistent with the regional pathway approach.
Outside Asia, Standard Bank of South Africa seems to be the only bank that has chosen a regional pathway approach, which appears more suitable to the African continent.
In Asia, the use of the regional pathway seems to be more pragmatic because of the differences in available data and information.
For the oil and gas industry, there are different pathways that are making significantly different assumptions on the availability and scalability of alternative technologies like hydrogen. These include issues, such as when hydrogen will become widely available, as well as, when the oil and gas industry can reduce its oil and gas consumption and go into hydrogen.
For example, certain pathways assume an earlier commercialization of hydrogen, therefore concluding that oil and gas consumption can be cut off by 2030, while others assume a much later date and scale of commercialization.
The bottom line is that an entity that uses regional pathways needs to have assumptions that it can believe in, that it can stand by, and are credible to others.
In any case, the use of the regional pathways towards net zero seems to be gaining ground in Asia based on feedback from G10’s Asian Advisory Board, which includes institutions like the Asian Development Bank, Asian Infrastructure Investment Bank, Temasek, UOB, Mizuno, the UN special envoy to climate change and green finance, etc.
There seems to be a consensus that the regional pathways approach to net zero makes sense for developing countries in Asia, and that there is an opportunity for the region to craft its own path in the race towards arresting global warming instead of just blindly following the lead of the more developed economies such the European Union and the United States.
The challenge for Asia in using the regional pathways approach is to be able to reconcile the different approaches and targets of individual countries in the region on the way to achieving the global targets set in the Paris agreement by 2050.
The other challenge for Asia is to be able to advocate its own position and approach towards net zero in the global arena, such as at the United Nations Climate Change Conference or Conference of the Parties of the UN Framework Convention on Climate Change, more commonly referred to as COP27. This is important since climate change is a global phenomenon that impacts the whole world.
Although there were some significant achievements in this year’s COP27, particularly the establishment of a loss and damage fund), there seemed to be little content and discussion focused on Asia.
But for Asia, the relevance of COP27 cannot be underestimated since it appears to be the catalyst for the launch of the Just Energy Transition Partnership (JETP) at the Group of 20 (G20 summit meeting in Bali by Indonesian President Joko Widodo and the leaders of the International Partners Group (IPG) co-led by the US and Japan.
According to the joint statement released by IPG on November 15 2022, the JETP aims to develop a comprehensive investment plan (the JETP Investment and Policy Plan) to achieve Indonesia’s decarbonization goals.
The fact that the announcement was made as the COP27 was happening half a world away in Sharm El Sheikh, Egypt, can only be an indication that Asia realizes the urgency of climate change and that the region has to play its part in achieving net zero by 2050.