The financial industry needs to strengthen its understanding of international sustainable finance standards for Taiwan to maximize related opportunities.
In September 2022, the Financial Supervisory Commission (FSC) announced the third version of its Green Finance Action Plan – a key document outlining Taiwan’s vision for a net-zero emissions future. The plan focuses on achieving core objectives in the areas of deployment, funding, data, empowerment, and ecosystems to reach the goal of net-zero emissions by 2050.
The action plan “is a very comprehensive set of policies that [the Taiwanese] are trying to promote that covers a lot of the really important areas” in green finance, says Jingwei Jia, the Hong Kong-based associate director at Sustainable Fitch, a unit of Fitch Solutions. The plan serves as the nexus for consolidating the powers of the government and the private sector while also strengthening the role of financial institutions.
In line with the FSC’s objectives, the Taiwan Academy of Banking and Finance (TABF), the Taiwan Insurance Institute, and the Securities and Futures Institute in December last year introduced Taiwan’s inaugural sustainable finance evaluation indicators. These encompass 112 industry-wide indicators, 58 of which apply to specific types of businesses.
Initially, the focus will be on relatively large financial institutions. Later, smaller institutions “will be gradually incorporated to spur financial institutions to take a hard look at climate and ESG (environmental, social, and governance) risks,” states the FSC’s official website. The FSC further seeks to “exert the influence of the financial industry and guide consumers, investors, and physical industries to recognize the importance of sustainable development.”
While this is an important step, Taiwan’s green finance efforts remain the most rudimentary of the four Asian tigers – Singapore, Hong Kong, South Korea, and Taiwan. In 2021, Taiwan issued just US$770 million in green bonds, according to data from the Climate Bonds Initiative. With US$12.57 billion in green bonds, South Korea was second in the region – just behind China – while Singapore was fourth with US$6.89 billion. For its part, Hong Kong issued its largest-ever green bond in June, raising US$6 billion.
Taiwan has not yet participated in any joint sustainable finance initiatives in the Asia-Pacific region. In contrast, Singapore in April announced its intention to cooperate with China to boost green finance flows between itself, Beijing, and the region. Meanwhile South Korea, together with the World Bank Group, established the Korea Green Growth Trust Fund in 2011 to support developing countries in implementing sustainable growth strategies.
“Although ESG is a very hot topic in Taiwan, it is also a very unfamiliar topic because Taiwanese society’s ESG literacy needs to be strengthened,” says Honda Chen, an associate research fellow and head of the Sustainable Finance Office at the TABF, a training institute and think tank. “There are many misunderstandings [in Taiwan] about the basic spirit of ESG and the current international ESG standards and regulations.”
For example, ESG investing should consider stakeholders’ interests, and companies may have to accept lower profits to be ESG compliant, notes Chen. This concept has generally yet to take root in Taiwan, “where many people still consider ESG as window dressing,” he says. Chen adds that another obstacle to the development of a solid green finance strategy in Taiwan is its tendency to excessively adhere to prescribed forms.
Nevertheless, Taiwan’s green finance policies have seen some positive development. Some firms within the financial sector are actively reorienting their business models to better reflect sustainability concerns. For instance, in July 2021, Taipei Fubon Bank together with paper industry group Yuen Foong Yu launched Taiwan’s first green finance program, certified by a third-party accounting firm in accordance with the Green Loan Principles, an international standard established by the New York City-based Loan Syndications & Trading Association. According to Fubon, the proceeds of the program will be utilized for renewable energy generation, zero coal-fired steam and electricity co-generation, and energy saving in recycled paper production.
Fubon Asset Management says that it adheres to the United Nations’ Principles of Responsible Investment and consistently monitors the sustainability commitments of the companies in which it invests.
“Fubon uses sustainability research and surveys on the companies invested in engagement efforts and shareholder activism to exert its influence in encouraging those companies to operate sustainably,” the financial firm says on its official website. It further notes that it has established internal standards to incorporate ESG factors into investment decisions.
“Apart from Fubon Bank, domestic financial institutions like Cathay United Bank, E.SUN Commercial Bank, and CTBC Bank have also performed well in promoting green financial services,” says Lee Cheng-hwa, an industry analyst at the semi-governmental Market Intelligence & Consulting Institute (MIC). “It can be observed that in this aspect of green finance, scale remains a fundamental consideration.”
Lee adds that E.SUN Commercial Bank, as an affiliate of a mid-sized financial holding company, has placed emphasis on providing carbon reduction credits to numerous small and medium-sized enterprises. This approach is considered a distinctive feature in Taiwan, where such companies serve as the backbone of the economy.
In June 2022, the Bureau of Labor Funds (BLF), Taiwan’s largest pension manager, selected the fund management arms of HSBC, Morgan Stanley, Legal & General Investment Management, Schroder Investment Management, and Wellington Management to run Asia’s first climate change-focused fund, valued at US$2.3 billion. Each of the five fund managers will oversee US$460 million in assets. They will be required to undergo quarterly and annual reviews by consultants to ensure that investments are allocated to combat climate risks, according to Liu Liju, the BLF’s deputy director general.
Taiwan’s over-the-counter stock exchange, the Taipei Exchange (TPEx), has had a dedicated platform for developing sustainable bonds (including social bonds) since 2017. Cumulative issuance has reached more than NT$400 billion (US$12.36 billion), with green bonds accounting for NT$306 billion.
TPEx calculates that it issued NT$40 billion (US$1.24 billion) in green bonds in 2021, a much higher figure than the Climate Bond Initiative’s tally of US$770 million (NT$24.91 billion) for all green bonds issued in Taiwan that year. The difference could be attributed to a discrepancy in how Taiwan and the Climate Bond initiative determine what constitutes a green bond.
When it comes to the issuance of green bonds, Jia notes that Taiwan’s market environment differs from that of Hong Kong and Singapore. She anticipates that issuance levels in Hong Kong and Singapore will surpass those in Taiwan, given their international orientation. Jia notes that most green bonds issued within Taiwan are denominated in the local currency.
“It is very obvious the regulator is trying to expand the scale of the domestic sustainable bond market and prefers the fundraising activity happening in Taiwan,” she says.
Looking ahead, Taiwan will likely place a growing emphasis on green finance out of necessity. Rising global temperatures indicate that Taiwan will face more frequent and extreme weather events in the years ahead, including typhoons and droughts. This year’s drought was the worst in nearly a century.
Now more than ever, Taiwan depends on energy-intensive industries for its economic livelihood. Efforts by government and industry in the mid-2010s to accelerate an industrial transformation that would give software and services a larger role in the economy have waned amid the U.S.-China trade war and the corresponding reshoring of factories from China to Taiwan. Having doubled down on the manufacturing of technology hardware, Taiwan is stretching its limited resources thin, leading to rising blackout incidents.
In December 2022, Taiwan’s Central Bank announced that it would begin incorporating climate change risks into its modeling and forecasts for inflation and economic growth, in addition to adjusting its monetary policy to support sustainable development.
Taiwan will also want to ensure that its capital markets and overall business environment increasingly align with international green finance and ESG standards. “If you’re listed on the stock exchange and above a certain size, you need to start thinking about ESG,” says Jia. “Foreign institutional investors will be asking for information. If you want to have more broad exposure to investors from Europe and North America, most will be asking for this information.”
Jia notes that Hong Kong is tightening disclosure rules for companies that want to be listed in the city. “Taiwan definitely already realizes it,” she says, acknowledging the increasing investor and regulatory emphasis on ESG disclosure.
For his part, TABF’s Chen says that Taiwanese companies’ understanding of how carbon credits and offsets work must improve for its green finance action plan to enjoy broad success. Previously, “many Taiwanese companies mistakenly believed that they could purchase cheap carbon rights from abroad to offset the cost of the European Union’s CBAM [Carbon Border Adjustment Mechanism],” says Chen. The CBAM puts a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU, encouraging cleaner industrial production in other countries.
Meanwhile, Taiwan seems to be moving toward a carbon fee system rather than one based on taxes. The Ministry of Environment in August said that 512 manufacturing industries, each emitting over 25,000 metric tons of carbon dioxide a year, would be charged carbon fees in 2025 based on the verification of their emissions in 2024. Although the fee has not yet been formally announced, the reported figure of NT$300 (US$9.32) per metric ton of emissions has been criticized by environmental groups as inadequate, considering the challenges posed by climate change.
Ultimately the “green and low-carbon transformation [of the economy] is a global trend and an inevitable path,” says MIC’s Lee. “Due to the significant presence in Taiwan of energy-intensive industries, there is an even greater need [than in other countries] for proactive measures.”
“Whether the financial sector can support this transformation will be a crucial driving factor in its success,” he adds.