For government policies to be implemented effectively, the driving force is a must. The best such force is social awareness. For example, many investors now specify an interest in ESG products. They must make good use of this moment and design appropriate reporting systems to direct private funds to products that live up to their name. Doing so will greatly benefit sustainable development.

The European Union has developed several programs for sustainable finance. The Sustainable Financial Disclosure Regulation (SFDR) requires disclosure by funds. The sustainable classification standard known as the taxonomy sets sustainability standards for every economic activity, and based on that, calculates the sustainability of each company. Then, various funds calculate the perpetual purity of each fund based on the weight of the company that it holds. Whether it is the perpetual purity of each company or the perpetual purity of each fund, it must be disclosed for investors' reference.

(Source: Honda Chen)

Taiwan’s Financial Supervisory Commission (FSC) and Environmental Protection Administration of the Executive Yuan also reference overseas practices as they design domestic policies. Some have however misunderstood the design of the EU system – in particular that the EU hopes to make use of private ESG investment. Taiwan’s government should introduce incentives like preferential lending in response to disclosures in accordance with regulations.

In fact, it should not be the government’s job to promote green investment, but that of ESG investors. The yield of green bonds in the primary market is about 0.1-0.15% lower than that of other comparable bonds. That is to say, investors are willing to support those who borrow to facilitate sustainable development with lower returns. There is currently strong demand for ESG financial products. Competition among investors has pushed the price of green bonds up.

(Source: Honda Chen)

Therefore, the government does not need to give direct incentives, but rather to ensure that the green financial products on the market actually live up to their name, and prevent investors from being duped, which in this context is known as “greenwashing.” 

In addition, in order to avoid an oversupply of ESG funds as opposed to an undersupply of available products, resulting in unreasonably high prices, the government must encourage financial institutions to actively transform to meet the sustainability threshold in terms of system design, helping increase the supply of green financial products.

Furthermore, there are some misconceptions that companies who do not meet the sustainability threshold will not be able to borrow money. In fact, based on the EU's planning, more than 90% of companies currently do not meet the threshold, but the EU requires that companies quickly propose transformation plans. If these plans become effective, they will be able to obtain financing, and banks will be able to organize these debts into green bonds or other green securities. Of course, those who continue to wait and see and are unwilling to transform themselves may lower their credit scores based on entity risks or transformation risks, thereby affecting their overall credit situation.

In order to reduce administrative costs, the system should be simplified, or designed to extend to existing policies, so that the industry isn’t required to rebuild its entire system. Singapore has also proposed a system design that is different from that of the EU, and the UK is also likely to have its own approach. Taiwan should pay close attention to developments in these countries.

About the author:

Mr. Honda Chen is Head of the Sustainable Finance Office of the Taiwan Academy of Banking and Finance (TABF), and specializes in green finance and macro-prudential policy development and management. He is focused on climate change and green finance issues, especially global climate policies such as taxonomies and climate stress testing, and also led his team to research development of sustainable finance in Taiwan. Before joining TABF, he had worked as Chief Secretary for the Environmental Protection Administration (EPA) of the Executive Yuan and as Secretary Officer at the Secretary-General Office of the Executive Yuan.

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