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Editor in Chief, The Taiwan Banker
Hank Huang (黃崇哲)
ESG Investment in an Ever-more Complex World 2020.03 The Taiwan Banker NO.123

A recent report entitled “The Green Swan,” published by the Bank of International Settlements (BIS), warns central banks, legislatures, and regulators of the challenges that global warming may pose for financial stability, and calls for countermeasures to prevent catastrophic consequences. Global warming will pose great risks not only in conventionally recognized areas like the environment and public health, but also for monetary and fiscal policy.

In fact, despite calls for reduction in carbon intensity due to its impact on the climate, in a climate of long-term financial liberalization and globalization, energy-, emissions-, and labor-intensive production chains have migrated en masse from developed countries to undeveloped areas with more lax regulation. This process has caused unemployment and exacerbated wealth gaps while allowing polluters to profit.

The entrance of the millennial generation into politics and the mobilization of Occupy Wall Street spurred calls to rethink the role of the financial industry. Three major dimensions, besides return on capital, have emerged: Environment, Society, and Governance (abbreviated as ESG). Specific tasks include carbon footprint reduction in response to climate change, conservation of natural resources, fair employment rights, construction of civil society, prevention of corruption and bribery, and reasonable executive salaries.

ESG investing is implemented mainly by routing capital through different financial products. This trend emerged following calls for ESG standardization from international organizations in the 1990s. The Equator Principles of 2007, the sustainable finance efforts by the G20, and the UN’s Principles of Responsible Investment all aim to guide industry development using institutionalized standards, thereby helping it contribute to a better world.

Due to its international status, however, Taiwan has been restricted from participating directly in this international trend. The Principles for Responsible Investment, for instance, have been signed by over 200 members, but Taiwan’s financial industry cannot participate on an equal footing, limiting its opportunity to share its current green energy financing promotion efforts with the international community.

Taiwan however has ample opportunities to guide capital for the greater good. It has a great supply of capital surplus. Aside from green energy, by guaranteeing land provision and minimum purchases to appropriately plan and issue social impact bonds, the government can turn long-term care, health promotion, and even youth housing into ESG financing targets. This transformation will not only be helpful for sustainability, but can also drive the next stage of Taiwan’s development.

As human activity endangers sustainable development, and a minority of economic actors harm the ability of others to survive, ESG investing makes use of financial mechanisms to guide capital towards less harmful industries and activities. ESG principles will help ensure that development remains on a sustainable path. As current stewards of the planet’s resources, passing a better world onto the next generation is our highest possible calling.