Climate Risk and Revenue: A Deep Dive into Japan and Hong Kong's Financial Sectors

As the discussions surrounding climate change continue, some institutional investors and asset managers are seeking data to shape their sustainability initiatives. While in-depth information is readily available for Europe and North America, stakeholders in the Asia-Pacific region might feel left in the dark due to perceived lack of coverage.

The purpose of this article is to dispel that perception as we zero in on the financial sectors of Japan and Hong Kong and compare them against the global ACWI index. We shed light on how these two influential markets are handling sustainability.

While Japan leads the charge by seamlessly integrating Sustainable Development Goals (SDGs) into its national agenda, the situation in Hong Kong is more complex. We utilised the Impact Cubed climate dataset—available on the FactSet Marketplace—to demonstrate that comprehensive APAC coverage does indeed exist.

Coverage Across APAC

To proxy both hubs, we selected funds that track the JPX and HKX, as well as using MSCI ACWI equivalent.

Starting with Targets

One of the primary markers of a region's commitment to help stem climate change is the proportion of its investments in companies with approved Science-Based Targets Initiative (SBTi) goals. These targets demonstrate a company's actions to reduce its carbon footprint. Targets are considered science-based if they are in line with the latest climate science to meet the goals of the Paris Agreement—limiting global warming to 1.5°C above pre-industrial levels.¹

While Japan showcases a promising 43.8% of its investments aligned with SBTi-approved targets, Hong Kong lags at just 4.6%. In comparison, the global average, represented by ACWI, is 35.3%. This difference accentuates the need for Hong Kong to push its businesses toward clearer climate goals.

A low percentage of companies with an SBTi-approved target in Hong Kong indicates a potential vulnerability. Investors should be aware of the evolving regulatory landscape and consider the risks of potential carbon regulations that could affect company valuations.

Revenue from Climate Solutions

The transition to a greener economy is also marked by how much revenue is earned from climate-positive solutions. Japan, which derives 11.1% of its revenue from such solutions, is ahead of the curve compared to the global average of 7.3%. However, Hong Kong is yet to make significant inroads in this domain given its 0.7% revenue.

The low figure in Hong Kong may appear paradoxical when considering China's significant investment in clean energy. According to the IEA², China invested approximately $190 billion in clean energy, a sum that even surpasses the combined investment of the entire European Union. It's important to note, however, that investment in clean energy doesn't necessarily translate immediately into revenue from climate solutions—although this may come in time. The disparity may also reflect the geographical and economic complexities within the country.

The significant underrepresentation in Hong Kong's revenue from climate solutions indicates a potentially untapped market for sustainable innovations. Investors might consider researching growth opportunities among companies that offer new sustainable solutions, particularly as global demand for such products and services continues to rise.

Companies’ Sourcing Renewable Energy

Renewable energy is a pivotal piece of the climate puzzle. When we look at how much renewable energy companies within both regions are using, Japan's renewable energy sourcing stands at 22.6%, whereas Hong Kong lags slightly at 18.5%. Both regions, however, are trailing the global benchmark of 29.7%, as indicated by ACWI. The lag in renewable energy adoption presents both a challenge and an opportunity for investors.

Carbon Price Resilience

Carbon price resilience quantifies the financial buffer of potential carbon taxation. Our findings show that for every tonne of scope 1 and 2 carbon emissions, Hong Kong generates $58,600 pre-tax profit. That is significantly higher than both Japan’s and the global benchmark’s pre-tax profits of $38,400 and $36,600, respectively. The difference showcases Hong Kong’s higher resilience to future carbon taxation.

Although some of the resilience comes from the sectoral make-up of Hong Kong securities—largely comprised of real estate—its larger economic buffer may give investors more peace of mind if they are attempting to mitigate the risks of future carbon regulations or taxation.

Conclusion

As the world steers toward a more sustainable future, understanding regional intricacies will be crucial for investors. Investors can inform their decisions with our climate data via FactSet, which we used to run this analysis. To interact with an example of the climate dataset, access the Impact Cubed instant preview.

References

1 - How is the SBTi Funded? - accessed October 2023.

2 – IEA, World Energy Investment Report 2023 – accessed October 2023.

This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.