As we move closer to 2050, the pressure to reach global net-zero greenhouse gas (GHG) emissions grows exponentially.

The latest Intergovernmental Panel on Climate Change report released in March 2023 was a “final warning” and underscored the urgency of “more ambitious action”.

Decarbonisation needs to happen fast, very fast, if we are to limit the damaging effects of GHG emissions on our planet.

This need for speed has understandably drawn intense scrutiny and debate. On one hand, we need to increase the pace of global decarbonisation. On the other, we must do this while ensuring a “just transition” to net zero.

A just transition is, simply put, greening the economy in a way that is as fair and inclusive as possible to everyone concerned. In the process, livelihoods remain secure and no one is left behind. The outcome is a resilient society that is able to respond to both social and environmental challenges.

In South-east Asia, the need for a just transition is even more pronounced as the region has been, and still is, undergoing massive economic development, urbanisation and industrialisation. The immense energy demands of supporting the region’s socio-economic growth still largely ride on the back of fossil fuels. An abrupt move away from fossil fuels would affect communities and livelihoods.

The strident demands from climate activists grab headlines, but do not serve society or help deliver the solutions required. They put intense pressure on banks to walk away from financing “dirty” businesses, and this essentially means starving such companies of cash flow needed to fund activities related to their transition.

If banks end financing, these companies would have no choice but to turn to funding channels that are less regulated. This means it could get even harder to motivate these companies to make the transition.

A poorly executed transition would also increase the risk of slower economic growth, due to inflationary pressures on energy prices. This could then lead to weaker employment and social consequences.

Not a decoy

Critics of a just transition would label it as a decoy to allow polluters to buy time and delay the pain they will eventually face.

But without a just transition, what would happen to our societies?

Access to affordable energy is a basic need for individuals and economies to thrive. Citizens, companies and communities need to be able to power their homes and villages, hospitals and schools, businesses and cities.

Countries would be naive to give up energy access and security, as they have learnt from the Russia-Ukraine conflict. In South-east Asia, it is estimated that more than 70 per cent of energy supply comes from fossil fuels, such as oil and gas.

Greener technologies to generate and distribute affordable clean energy are not yet ready or at scale. Hydrogen is still being developed as an alternative and commercially viable power source.

Energy providers need to navigate their way through the daunting task of decarbonising, while balancing their commercial viability. Society needs their efforts to maintain energy affordability and accessibility. As such, the scale and pace of their decarbonisation need to be realistic, pragmatic and measured. The consequences of failing would impact entire economies and societies.

So how do we ensure that such systemically important players keep their focus beyond short-term profits?

We believe the answer lies in a whole-ecosystem approach that includes banks, including UOB.

Lack of clarity

Globally, banks are ramping up financing to companies in green technologies and renewable energy. But such “pure green” business activities are estimated to make up only about 5 per cent of the global economy by 2050. While every little bit counts, this form of green finance alone will not move the needle much.

What is more impactful is the progressive decarbonisation of all sectors of the economy. This is where transition finance comes in, to provide the funding for high GHG-emitters that are adopting cleaner technologies and becoming greener with time.

Transition finance needs transition pathways: clear definitions and guidelines on acceptable activities and timelines for decarbonisation, which Singapore has set out to achieve. However, a lack of internationally acceptable pathways makes the chalk lines in the transition finance journey blurry. This is also where controversy surfaces every now and again, when supposedly dirty companies are still being financed.

A real lack of clarity is a roadblock to the necessary funding for the just transition of our economies.

At UOB, we actively engage with our stakeholders, including regulators, to discuss the importance of coming up with clear transition pathways for South-east Asia. Clarity will guide policy-setting and shape regulations, giving companies the playbook to invest in new technologies, and banks the confidence to finance such activities that will help drive our region’s transition to net zero.

Leaning into the challenge

Sustainability is fundamental to UOB’s purpose of building a sustainable future for Asean. We care about the real impact that we can create for our customers and communities.

As a catalyst and enabler to influence and lead the real economy, we do not just bring our own financing portfolio to net zero by walking away from reputationally-inconvenient companies.

Instead, it is our moral imperative to lean into the difficult challenge of transition, to help our customers drive action and deliver real-economy decarbonisation in an inclusive way.

Our promise to customers is that we will help them in the transition. We get them to articulate what sustainability means to their business. We look for high-quality road maps that include clear pathways, targets and data reporting that are core to their businesses.

If our customers work with us, both sides win. If we abandon them like many groups are calling for, then we would all fail Mother Earth.

Of course, if the customer proves reluctant to work with us, we will then have to part ways.

As responsible bankers, we do not shy away from these difficult conversations. By and large, most customers understand and join hands with us to take action together.

Everyone may be at different points on this long and arduous journey to net zero. But we are all working towards the end goal, and we need a mature and pragmatic approach to make sure we all get there together.

Source: The Business Times. Link Here. 

China has clearly started playing a larger leadership role in the world.

This year, China has embarked upon meetings with a range of leaders from numerous countries in Asia-Pacific, the Americas and Europe; it helped broker a deal between Iran and Saudi Arabia to re-establish diplomatic relations; and has pushed for a political settlement for the war in Ukraine.

At home, the country has hosted scores of business leaders. Most recently, the China Development Forum in March attracted 69 foreign chief executive officers and 20 other guests from academia and international organisations, including Blackstone’s Stephen Schwarzman, Pfizer’s Albert Bourla and Apple’s Tim Cook. The latter underscored the importance of a symbiotic relationship between China and Apple.

Some companies that have significant business in or with China might be concerned about the country’s future as a market or a supply chain hub following the pandemic and ongoing geopolitical strife. Some are talking about “de-risking” – shorthand for implying that “China is risky”.

But that is not necessarily the thinking of many global companies, most of which have a keen interest in how fast China will evolve.

China has shown the global business community that its economy is recovering from the pandemic, and it is expected to grow at one of the highest rates in the world this year.

The International Monetary Fund predicts China’s real gross domestic product (GDP) will grow at 5.2 per cent this year, while the world is expected to average around 2.8 per cent and the G7 nations 1.1 per cent.

When German Chancellor Olaf Scholz visited China in November, 12 German business executives came with him. French President Emmanuel Macron was accompanied by more than 60 business executives in his recent trip to China. Brazilian President Luiz Inacio Lula da Silva brought 240 business executives with him on his visit last week.

Several global giants have already announced large investments in China. Saudi Aramco and its Chinese partners recently agreed to invest US$12.2 billion in a joint venture in north-eastern China. Aramco also acquired a 10 per cent stake in Chinese firm Rongsheng Petrochemical for US$3.6 billion.

Meanwhile, Shell and China National Offshore Oil Corp signed a US$7.6 billion deal for an expansion at their joint venture in Guangdong province at the end of March.

French aerospace giant Airbus also revealed plans for a second assembly line in Tianjin, while Tesla is set to build a factory in Shanghai to build its Megapack batteries.

While every investment is risky in some sense, these companies’ decisions to commit such significant investments in China indicate that for them, the strategic need to be in China outweighs the risks.

To this end, global companies are increasingly recognising that China is resilient.

Many observers in the West have attributed China’s rise to it being “authoritarian”, the help of state subsidies, unfair trade practices, copycatting and other similar reasons.

There may be some truth in some of these narratives, but explaining China’s growth in so simplistic a manner is not fair.

I have begun to see a small number of Western observers beginning to appreciate the meaning of Chinese modernisation and how it is different from that of the West.

As China searches for its own version of modernity since its reform and opening up, the discovery process and the evolving intellectual framework have gradually become the bedrock of the country’s resilience.

Some foreign companies have come to China but could not make things work, due to reasons such as supply chain disruptions during the pandemic and trade restrictions caused by sanctions imposed on China.

But they are finding themselves in a difficult position because China represents a large market and domestic firms could potentially develop their own technology to replace the foreign products subject to sanctions.

For many global companies, China is either a major source of revenue, an epicentre of supply chains, a key source of inspiration for innovation, or all of the above.

While there are forces trying to decouple China from the global market, there are also those who are trying to keep the world together, at least some parts of it. Business leaders understand that in this fast-evolving global context, China will continue to play a major role, and the smartest minds will figure the right strategy for achieving the best competitive advantage amid an era of significant change. 

Source: The Business Times. Link Here. 

More than 80 per cent of businesses in Asia are looking to expand internationally for revenue and profit growth in the next three years, but face challenges in finding overseas partners, and legal and tax support, according to the UOB Business (SME & Large Enterprises) Outlook Study 2023.

The bank’s findings were from an annual survey of small and medium-sized enterprises (SMEs) and large enterprises in Asia. This year, the scope of the study was expanded beyond Singapore to include companies in Indonesia, Malaysia, Thailand, Vietnam and China for the first time.

Of over 4,000 businesses surveyed, 83 per cent, or four in five, want to expand overseas. The desire is most pronounced in companies in Indonesia, China, Thailand and Vietnam, while those in Singapore, Malaysia and Hong Kong are more hesitant. Top sectors looking to expand are industrials, oil and gas, followed by wholesale trade, and technology and media.

Asean and China are the top two markets businesses want to expand to, with only one in four companies interested in expanding beyond Asia. Within Asean, Singapore ranks at the top of countries for businesses to venture into, while Thailand and Malaysia tie for second place.

But challenges in expanding overseas are holding businesses back, top among which are difficulties in finding the right partners to work with, lack of in-house talent, as well as lack of legal and regulatory compliance and tax support. 

Most businesses cited needing more support to venture overseas, including connecting with overseas partners and clients, and tax incentives.

About four in five companies also value having a cross-border digital trade platform for their overseas expansion.

In addition, around 60 per cent of SMEs surveyed highlighted that their supply chains have been affected by ongoing geopolitical tensions. Some 90 per cent of businesses have been affected by high inflation, with increased cost of supplies and greater challenges in procuring suppliers.

About 30 per cent of companies are now trying to diversify their supply chain by building stronger relationships with their suppliers and tapping data analytics to help in their decision-making.

To ease supply-chain woes, SMEs want more support for tax incentives, employee reskill-and-upskill training programmes, easier access to funding, and connections to the right technology and solution providers.

Aside from supply-chain concerns, the study also found that sustainability practices were not widely implemented among businesses.

Although around 90 per cent of businesses believe in the importance of sustainability, only 45 per cent have implemented sustainability practices. Only 38 per cent of SMEs in Singapore have these practices in place, compared with more than half of SMEs in Thailand and Vietnam.

Businesses have attributed the low implementation rate to concerns about increasing costs for customers, which will in turn hurt their profits and revenue.

However, UOB head of group commercial banking Eric Lian highlighted that regulators, industry leaders and corporates are becoming more rigorous and disciplined in achieving sustainability standards within their supply chains.

“Businesses that are slow to embrace environmental, social and governance may lose out on business opportunities,” he added.

Source: The Business Times. Link Here.