Growth in Asia – addressing the climate challenge

This year sees the 30th anniversary of our investments business in Asia Pacific. To help mark the occasion, in May we held our first Sustainability Week in the region – bringing together colleagues, along with experts from across our industry, to share insights on how to address the urgent sustainability challenges we face.

As we look to the future, our CEO Stephen Bird sets out his thoughts on the next 30 years for Asia Pacific, and the pivotal role that the region can play on the path to net zero.

 

When Hugh Young and Peter Hames opened abrdn’s first Asian office in Singapore back in 1992, the world looked very different to how it does today. Japan was still the region’s dominant economy. China was one of the world's poorest countries and had yet to join the World Trade Organisation, and in total, Asia accounted for just 5% of the global economy.

Fast forward 30 years, and the transformation has been extraordinary. Asian countries account for more trade than any other region and more than a billion people have been lifted out of poverty. Capital markets have also evolved and the region has switched from being mostly a destination for foreign investors to one where local investors dominate its markets.

I first began working in Asia for Citibank in 1998 when the region was still in the throes of the Asia Financial crisis that started with the devaluation of the Thai Bhat and quickly spread across the rest of the region the year before. Asia was quick to learn the lessons of the crisis and took actions to build financial resilience and be more prepared for future shocks as a consequence. Thanks to the region's rapid recovery and its willingness to invest in the future, Asia’s share of the world economy is eight times larger than it was entering the crisis. Throughout this transformation, we have helped investors take advantage of the region’s growth opportunities, as well as navigate the inevitable bumps along the way. The lesson, as always, is to stay calm through volatility and keep your eye on the long game.

On that score, the next 30 years look to be every bit as exciting as the last. China and India are expected to become the world’s largest and third largest economies respectively in the next decade while their consumers will increasingly dictate global tastes and trends. Capitalisation of their equity markets could also increase by a factor of four or more by 2050.

Other countries in the region present exciting opportunities too. Bangladesh, Indonesia and Vietnam have some of the highest potential growth rates in the world, while Japan and South Korea's ageing populations have built up significant savings that need to be put to better work. And, as the region’s most open global financial centre, Singapore will be at the heart of all of it.

Of course, we can’t pretend progress will be linear or that there are not still significant challenges ahead. Globalisation – the driver of Asia’s stellar economic performance – is losing momentum and much rides on restoring faith in its benefits.

Then there is climate change - perhaps the most acute challenge the region faces. A by-product of Asia’s growth is that it has accounted for the lion’s share of the increase in global carbon emissions over the past three decades. This increased human footprint is also evident in rising air pollution and biodiversity loss.

There is no Planet B. Asia is home to some of the countries most exposed to the physical consequences of climate change, as Indian and Pakistani citizens enduring the current extreme heatwave can attest. While Asia cannot solve the climate crisis on its own, there can be no solution without such major economies finding a way to decouple their economic growth from fossil fuels.

The good news is that most of Asia’s major economies have now set net-zero targets, opening up the possibility that the region will have decarbonised by 2070. It is also playing a critical role as a provider of climate change technology solutions. Whether in the form of solar panels, batteries for electric vehicles or green hydrogen, decarbonisation is dependent on Asian innovation.

Asia is also catching up to Europe and North America when it comes to deploying sustainable investment strategies. Local investor interest in sustainability has increased and active engagement between asset managers, owners and companies creates opportunities for new forms of investing through sustainability-linked loans and bonds.

But what can be done to bring change faster?

We would call on governments to strengthen the credibility of their net zero commitments which would help provide investors and the finance industry with a greater ability to allocate capital to support the transition. More countries should follow China’s lead and establish carbon pricing which would bring certainty and encourage investment in low-carbon technologies and infrastructure. The revenue generated could be recycled into ensuring that the zero-carbon transition is a just one. We would also encourage the greater use of dedicated climate-related instruments such as green bonds; this would help align the interests of capital markets participants while the increased issuance would also encourage portfolio diversification.

Asia’s political, trade and financial forums should be used to harmonise climate and sustainability standards. The Monetary Authority of Singapore is already doing great work in this area, as are the Network of Central Banks and Supervisors for Greening the Financial System and the International Organization of Securities Commissions. But imagine how much stronger climate transition finance flows could be if everyone worked within a common framework?

There is more local investors and companies should do to strengthen their own climate commitments to align with global standards. This needs to change if Asia is to play its part in realising the Paris goals. We are deeply committed to driving positive change and have set up an APAC Sustainability Institute to facilitate education, investment and research innovation in the region.

This century is Asia’s century. It must also be the century in which economic objectives are reconciled with sustainability goals. The financial industry can and must play a pivotal role in converging these two priorities, guiding investment to support both outcomes. We look forward to playing our part.