The Next Step in Green Finance: By Accelerating Green Capital Flows



Current Challenges

The impact of climate change has attracted the attention of the financial and investment sectors. However, either from the perspective of risk aversion or environmental sustainability, the "greening" of finance should not be only about strengthening "green financial investments" but would also require more proactive actions. In particular, while the government has promoted "green finance" in terms of "green energy investments" and "green bonds", it has neither sought to improve the climate risk disclosure of investment projects nor strengthen investment reforms to achieve the true "greening of finance".


1. The Limited Scope of the Green Finance Action Plan

  • Taiwan's current "green capital" regulations is limited in its imagination, and is confined to the environmental, social and corporate governance (ESG) of responsible investment, as well as on enhancing the level of green energy investment. The current plan is focused on strengthening aspects such as green investment and green bonds, as well as in providing rewards and the promotion of green energy investment, but there are still inadequate reforms in terms of green capital flows.


2. The Lack of Participation by Taiwanese Sovereign Funds in International Green Mechanisms

  • Taiwan's financial system still lacks awareness of climate risks. The sovereign funds which are currently dominated by the public sector still have a limited understanding of climate risk issues in terms of ESG investment and risk control, and they have not proactively participated in relevant international mechanisms, such as Equator Principles and the Taskforce on Climate-related Financial Disclosures (TCFD).


3. A Lack of Basic Information Pertaining to Climate Risk Assessment

  • If financial stability is of concern, the information disclosure of risks faced by businesses would be the topmost priority when it comes to green capital flows, however the climate related disclosures made by investment institutions remain inadequate, resulting in a lack of risk assessment data. According to a survey of the 100 largest public retirement funds in the world, more than 60% of the funds have taken little or no actions in response to climate change and its impact.


4. Fossil Fuel Divestment

  • In addition to risk disclosure, sovereign and retirement funds which have invested in fossil fuel-related industries for a long time, are also faced with risks of their now stranded assets due to climate change, and they would therefore need to gradually divest from the high-risk carbon-intensive industry.



Proposed Action Plans

The key to developing a green capital policy lies in the reduction of climate risks, the elimination of investment obstacles, and the creation of an environment conducive to transformation in the context of risk disclosure. Four strategies are outlined below:


1. Adopt International Green Capital Standards

  • In addition to many private banks having independently signed up to the Equator Principles, the Taskforce on Climate-related Financial Disclosures (TCFD) is currently the most important green capital standard, and has been regarded by many international organizations and advocacy group as an important reference document, such as for the Global Reporting Initiative (GRI)'s GRI Sustainability Reporting Standards (GRI Standards). International green capital standards should therefore be adopted, with regular reports produced on climate risk disclosure and risk communication.


2. Climate Risk Disclosure

  • Members of the public are still largely unclear about the investments made by investment firms when looking at the financial information disclosed by the quasi-sovereign funds, which suggests that the climate-related risk disclosures made by investment firms are still inadequate. Climate-related risk disclosures and climate risk surveys should therefore be implemented in the financial sector to improve the awareness of climate risks in the financial system as well as improve the risk management of the financial system.


3. Fund Allocation Adjustment

  • Under the framework of climate risk disclosure, the direction of green capital flows is dependent on the asset allocation of the quasi-sovereign funds managed by government ministries, which would require these funds to terminate their investments in industries with high climate risks, gradually adjust their current investment portfolio and asset allocation, and finally, to strengthen investments in industries in relation to green energy and sustainable development.


4. Develop Complete Policies to Promote Green Capital Flows

  • A blacklist of firms which continue to invest in industries with high-carbon emissions could be created, which could then be used as an investment guide for firms, as well as provide a list of firms which adopt sustainable investment practices, and those which do not, so that by using a mix of positive and negative reinforcers, in addition to the implementation of green capital policy tools, the hope is that the investment market would one day independently support green industries even without the need for government policy incentives.