TAIPEI (Taiwan News) — In April 2021, Taiwan said it was committed to achieving a target of net-zero carbon emissions by 2050, matching similar resolutions by countries across the world in response to the ongoing global warming crisis.

The government has put in place its 2050 Net Zero Pathway and it is a comprehensive and detailed plan that will require careful execution. In order to enable Taiwan to move to a sustainable future, Taiwan’s financial institutions (FIs) must deepen knowledge of their customer base and the businesses that rely on FIs to finance their business.

It is not just Taiwan’s FIs that must deepen their knowledge. The global financial services industry has a critical role to play in achieving net zero targets by mid-century. Estimates for the global investments required to transition the energy sector alone by 2050 range from between US$3.5 trillion (NT$107.3 trillion) to US$5.8 trillion per year.

Taiwan’s FIs must recognize that the transition to net zero will involve more than simply investments and underwriting for “green” assets. Renewables business and electric vehicles are "nice to have" but they will not be enough for Taiwan to achieve net zero across its entire economy.

For many of Taiwan’s businesses, the transition will require fundamental change to their current operations and these businesses will need capital. FIs, which arguably also include insurers, non-bank lenders and investors, are all crucial to making that capital available.

FIs have an obligation to incentivize and support their clients during this transition period. This has particular significance in the Taiwan market where 95% of entities are small or medium sized entities (SMEs). SMEs will need ongoing and practical, professional support and FIs may find they need to invest in and train highly qualified staff and adopt FinTech solutions to make this transition feasible.

Forefront of change

FIs, finance and FinTech have now moved to the forefront of the fight against climate change. However, it is arguable that the current capabilities of many of Taiwan’s FIs, potentially stand in the way of achieving the 2050 goals.

One issue for Taiwan’s FIs is the environmental, social and governance (ESG) reporting obligations for listed entities that have come into effect this year. Part of the issue is that a globally accepted definition of ESG does not exist. ESG is difficult for many institutions to understand and the creation and structuring of reports is daunting for many entities.

There are internationally developed, fully automated ESG risk rating FinTech solutions in the marketplace to assist with the ESG reporting obligations and many other bespoke solutions. However, it is likely that only a few Taiwan banks are actively engaged with such solutions.

Investors, regulators and stakeholders across society are increasingly demanding greater transparency from organizations on ESG and sustainability performance to help assess long-term value. To meet stakeholder demands, organizations must broaden the scope of their reporting and seek new ways of communicating strategic performance with both nonfinancial and financial metrics.

Nevertheless, Taiwanese companies are now obliged to meet their ESG and sustainability responsibilities. It should not just be seen as an obligation but also a potential benefit, in the longer term, to pay close attention to stakeholder perceptions, and the social and environmental consequences of their operations. This close attention can be good for business as well as the planet.

Borders on the outrageous

ESG performance is now integrally interwoven with financial performance and Taiwan’s FIs need to do much more to assist their customers with their ESG obligations.

There is also an apparent absence of desire of Taiwan’s FIs to involve themselves in the financing of Taiwan’s renewable wind industry. The one industry which seems to consume so much press and so much government attention and yet Taiwan’s FIs have left it up to foreign financiers to back this industry.

It is said by some Taiwan FIs that they do not have the risk methodologies to understand such a complex industry. But, its 2023, and with all of the FinTech and machine learning technology that exists, that “excuse” borders on the outrageous — if it is indeed true.

Perhaps the answer (or problem) lies in how Taiwan’s FIs are ultimately structured around basic financial returns. There is a perception that they have some sort of fiduciary duty to protect their shareholders from foreseeable risks that might affect those returns and Taiwanese investors and shareholders who expect those year-upon-year returns to be paid, even if they remain stagnant.

However, the world has changed and the obligation of FIs is to respond to market change, to manage that changing risk, and to adjust to economic trends. Climate change and sustainability are without a doubt the biggest economic trend of this century and the Taiwan FIs are obligated to follow the government’s lead on these commitments.

It is wrong to simply assume that transitioning to net zero is simply about risk mitigation. Transitioning can also represent tremendous opportunities and FIs that act swiftly on the transition will be able to take advantage of this global economic opportunity first and pave their institution’s way to a more profitable future and to the ultimate benefit of their investors and shareholders.

Out of comfort zone

This requires Taiwan’s FIs to step out of their comfort zones and to focus on all steps within the lifecycle of an investment, loan, or underwriting transaction. FIs must learn how to better evaluate transition plans at sector and sub-sector levels.

Government advisory panels, regulators, industry bodies, academics and climate finance experts agree that Taiwan’s FIs must show a clear understanding of detailed sectoral transition pathways to foster credible, achievable, and orderly transitions to net zero for each area of the economy.

There can be no argument that Taiwan’s FIs must understand their customer’s activities on a case-by-case or project-by-project basis. It is only at this level will FIs be able to understand client and investee emissions reduction performance more precisely. This detailed knowledge will help FIs to identify opportunities as well as  mitigate risks.

All of this will require FIs to deepen their understanding of the operations and supply chains of their customers and how those customers are set to transition. The transition will be paced differently across sectors and markets and Taiwan’s FIs will need to develop their understanding of these dynamics if they are to successfully navigate these changes.

Current indicators are that Taiwan’s FIs have a long road ahead of them to develop the ability to navigate the changes. Indeed, perhaps an entire mind-set change is needed.

There is no time for reflection, the time for action is now. The technology and expertise exist offshore, it is time for Taiwan to adopt and adapt.