Energy Transition and Decarbonization: Is Asia Prepared?

Climate change has the potential to disrupt economies worldwide and challenge companies across sectors and geographies, to varying degrees. As highlighted by the World Economic Forum’s ‘Global Risks Report 2025’ – the 20th year of publishing this report - climate change is one of the structural forces that ‘has been most consistently perceived as experiencing a clear ongoing systemic shift’.¹ Over the past 20 years and since the Global Risk Report was first published in 2006, environmental risks have significantly increased in ranking over the 10-year time horizon.² In addition, as shown in Figure 1 below, half of the top 10 global risks are related to environmental issues and climate change.

The United Nations' 29th Conference of Parties (COP29) emphasized the importance of enhancing global efforts to strengthen resilience to climate change.³ The global impact of climate change has already been felt across countries and industries, with each region facing its own unique challenges and opportunities.

Some Asian countries may face higher climate adaptation challenges as they are likely to be more vulnerable to the physical impacts of climate change. Based on our analysis of ISS and MSCI research, Thailand, Malaysia, and Indonesia may face higher physical climate change risks. In addition to the potential physical damage associated with climate change as well as loss of life and livelihood, and danger to society and communities, there may be risks for investors from a portfolio management perspective. During the 2011 floods in Thailand, for example, companies experienced major disruptions to their supply chains, which posed financial risks to investors. Globally, flood risk remains a top risk that could adversely impact supply chains⁴; extreme weather events such as wildfires and growing intensity of hurricanes also makes adaptation an urgent necessity.⁵

Many Asian governments have made net zero commitments in an effort to mitigate the effects of climate change. A growing number of countries in Asia such as Singapore, Korea, Japan, and China have also adopted global reporting standards such as International Sustainability Standards Boards (ISSB) IFRS S1 and S2, which focus on sustainability and climate related financial disclosure, respectively. These adoptions support better comparability in disclosure. Further adoption of ISSB standards as the global baseline will help improve interoperability across different markets in our view.

To help mitigate climate change and facilitate energy transition, taxonomies have been developed across Asian countries to support sustainable investment activities. China pioneered its first Green Bond Endorsed Projects Catalogue in 2015 and worked closely with the European Union (EU) to develop Common Ground Taxonomy (CGT). Most recently, the development of Multi-jurisdiction Common Ground Taxonomy (M-CGT) which was built on the CGT and expanded to include the Singapore-Asia Taxonomy (SAT), will help enhance the interoperability of taxonomies across China, the EU and Singapore.⁶

Using a three-tier ‘traffic light’ and Energy Transition Mechanism respectively, both the Association of Southeast Asian Nations’ (ASEAN) and Asian Development Bank’s (ADB) taxonomies included mechanisms to support transition finance.⁷ A survey conducted by the ADB Institute of 10 financial authorities also found that almost all surveyed have implemented, or intend to develop, a national taxonomy to scale-up transition finance.⁸

As highlighted in a recent ADB report, transition finance is increasingly recognized as a necessary component for effectively addressing climate change, especially in emerging markets where energy demand is growing and power generation and industry is carbon-intensive.⁹ In Asia’s case, we believe there needs to be a fine balance between the growing energy needs of industries, an emerging middle class, and energy transition.

In our view, climate change is complex and requires investors to employ multifaceted approaches. In addition to working with pure play ‘green’ companies, we believe reducing emissions also requires engaging with the highest-emitting industries, as some of the best know-how regarding emissions reduction exists within these high emitting companies.¹⁰ We believe this will likely facilitate real economy emission reduction and, ultimately, support the Paris Agreement goals.

In addition to targeting real economy emission reduction, some investors have expressed their desire to achieve portfolio decarbonization, and a growing number of investors in Asia, as well as globally, have set decarbonization targets in the past few years. A recent survey commissioned by State Street in EMEA also shows that more than 80% of asset owners surveyed have assessed and modeled the impact of different climate risks on their portfolios.¹¹

For many large investors, which are near-permanent holders of capital, achieving decarbonization targets and at the same time building a low tracking error portfolio to the benchmark is also desirable. For such investors, portfolio optimization is often preferable to simply screening out carbon-intensive industries in order to manage the tracking error to the benchmark and follow a more inclusive approach in portfolio construction. Portfolio optimization can also help investors with climate-related goals address climate mitigation and adaptation in a portfolio context, and achieve a range of climate objectives such as reducing carbon intensity, fossil fuel revenue and reserves, increasing green revenue and green bond allocation (in the case of fixed income portfolio) as well as targeting a range of forward looking climate objectives such as Implied Temperature Rise (ITR), Carbon Risk Rating and Climate Value at Risk which seek to reduce portfolio exposure to physical and transition risks. We believe forward looking metrics are crucial for assessing long-term trends and preparing for the future as energy transition will likely span several decades.¹²

We believe the development and adoption of green and transition taxonomies in Asia and globally will likely further support companies to align their activities and enable sustainable growth. Asia’s population and economic growth, and potentially keener vulnerability to the physical impacts of climate change, are at the centre of energy and climate transition discussions today, and investors needs to be mindful of these latest developments to inform their investment approaches.