Why Asia's banks are central to climate transition

Over half of the world’s CO₂ emissions originate from Asia¹ (as shown in Exhibit 1). There are several reasons for this: first, the continent has significantly and rapidly industrialised; second, its manufacturing sector – eg, electronics, automotive and consumer goods – is highly energy intensive; and third, coal remains key to the energy mix. However, in recent years Asia has become the world leader in green finance innovation, with record levels of renewable energy investments and green financing.

Seeking to reduce emissions while increasing investment in lower-carbon industries is a balancing act for Asia’s markets. Support for high-emitting extractive industries – eg, mining raw minerals for technology components and coal to meet electrical energy demand – is key for the region’s near-term growth. Meanwhile, development of low-emissions technologies such as electrification of transport and energy storage present new opportunities which are advancing at pace across the region. The banking sector therefore has an important dual role in financing growth and climate action for a credible and resilient transition.

Additionally, the region’s role as the backbone of global supply chains underlines why Asian banks’ financing is so critical to the climate ambitions of the global economy. Consider global scope 3 emissions – the greenhouse gas emissions (GHG) generated throughout value chains, both upstream and downstream of a company’s own operations – which account for over 70% of multi-national corporation carbon footprints.² Asia’s outsized impact on global supply chains directly influences these emissions.

Engaging with companies on the critical issue of climate action is one of our key stewardship themes. We developed a climate engagement project which included 20 publicly listed banks with a reach across China, India, Japan, South Korea, Taiwan and South- East Asia. The project sought to define a set of targeted outcomes for this sector by learning more about banks’ transition strategies, alignment with policy, progress in decarbonising portfolios, and leading and lagging practices. An extract from our engagement framework is shown in Exhibit 2.

Through these engagement dialogues, we observed both progresses and challenges in how financial institutions are reshaping the climate landscape of the Asian economy, across the continent and within individual markets.

Despite progress made in generating greener energy sources, Asia’s energy supply remains heavily dependent on fossil fuels, especially coal, with the region accounting for over 80% of global coal consumption.⁷ As mentioned earlier, banks must balance the financing of higher- emitting industries to support employment and economic growth in the near term, while scaling up investments in green energy and infrastructure for the future. Uniform, inflexible transition strategies – such as a sudden withdrawal from coal financing – may politicise the green agenda and could hinder progress towards a low-carbon economy.

However, scalability of transition financing is a major challenge. South-East Asia’s energy demand is forecast to double by 2040,⁸ driven by industrial growth in countries like Thailand and Vietnam. Stronger national support and regulatory incentives will be critical to sustain and expand transition financing and meet the region’s fast growing energy needs.

An additional and important dimension of our dialogues with banks is their financing of micro, small and medium enterprises (MSMEs) which constitute 90% of Asian businesses.⁹ MSMEs are particularly vulnerable to climate and transition risks because they lack the capital and resources of large corporates for climate adaptation planning. For example, MSMEs in high- exposure sectors like agriculture, food and agriculture, and forestry are disproportionately exposed to location- specific physical risks – for example flood frequency in palm oil plantations – but often lack the resources to quantify these risks. However, banks’ sustainability reports often focus on large corporate clients and overlook MSMEs.

Within our standard engagement questions on the scope of sustainability commitments and reporting metrics, we also push for details on dedicated funding mechanisms and advisory services tailored for MSMEs. Encouragingly, there are several initiatives from banks in Singapore and Hong Kong that are dedicated to support MSMEs with climate transition challenges. While these early-stage initiatives remain at pilot phases and lack the necessary scale, they signal progress in addressing MSME climate risks in a coordinated approach. We firmly believe that climate risk analysis should be integrated into credit assessments for clients of all sizes through the lifecycle of the loan and shared with companies. This approach bolsters strategic focus and actions for greater resilience against extreme weather events.

¹World Economic Forum, Why the battle for net-zero may be won or lost by corporate Asia, April 2023
²Source: Science Based Targets, Scope 3: Stepping up science-based action, February 2023 and Draft Corporate Net-Zero Standard V2 Explained: Scopes 1, 2 and 3 - Science Based Targets Initiative, March 2025
³“Top-down” refers to these typically being set by governments, regulators or other central authorities rather than emerging from within the firm
⁴PBOC, The People’s Bank of China Launches the Carbon Emission Reduction Facility, November 2021
⁵PBOC, China’s central bank steps up support for clean, efficient coal use, April 2025
⁶PBOC, China Monetary Policy Execution Report, Fourth Quarter 2024
⁷IEA, Coal Mid-Year Update – July 2024
⁸IEA, Southeast Asia Energy Outlook 2019
⁹Asian Development Bank, Asia Small and Medium-Sized Enterprise Monitor 2024