On a panel during the World Biodiversity Summit Climate Week in September, Sophia Cheng, chief investment officer (CIO) at Taiwan-headquartered Cathay Financial Holdings, expressed her concerns around the lack of attention paid to biodiversity loss, and how the financial sector can help.
Cheng (pictured above) emphasised that “everyone can influence a stakeholder, and the more we engage, the more successful natural investments will be”.
A passionate advocate on sustainability topics, Cheng attended her third Climate Week in New York, from September 22-29, on behalf of Cathay Financial.
Cathay Financial Holdings is one of the largest financial groups in Taiwan, with subsidiaries including Cathay United Bank, one of the island’s largest commercial banks; Cathay Life Insurance, a leading Taiwanese insurer that issued its first dollar bond in July; Cathay Securities; among others.
According to its annual report, the group manages $418.4 billion in assets as of end 2023, and earned net income of $1.7 billion last year.
Meanwhile, Morningstar statistics suggest that Taiwan-domiciled sustainable funds continue to attract the most capital inflow in the third quarter, at $2.4 billion, accounting for 80% of Q3 inflows in Asia Pacific, ex-Japan and China. Following the Financial Supervisory Commission’s July guidelines that recognise actively managed exchange-traded funds (ETFs), Taiwan’s sustainable fund market is also witnessing a boom.
Cheng said that years ago, Cathay Financial was criticised by European investors for having an “extremely low” environmental, sustainability and governance (ESG) rating. Yet now, she is one of the most vocal ESG voices in Taiwan’s finance industry, trying to press ahead with responsible and impact investing, starting from Cathay’s portfolio companies.
In New York, FinanceAsia spoke with Cheng on responsible investment from her perspective, and how the Taiwanese market has progressed.
Please note that excerpts are translated from Chinese and edited for clarity.
FA: What are your priorities when it comes to responsible investing?
Cheng: We are increasingly prioritising social and environmental impacts over pure financial returns when speaking to our portfolio companies, and also actively engaging in related risk forecasting to establish immunity against significant troubles in the future.
As a starting point, we examine our existing portfolio companies for various issues, for example, manufacturing of controversial weapons; engagement in wars; or being included in a sanction list. Within a certain industry, we look at how a company performs in terms of major issues within that space, such as client data protection, talent retaining, or human rights.
We are also looking at impact investing, which is a step further than just responsible investing. We are not only looking at a company’s own ESG ratings and practices when making new investments. Instead, we value positive social and environmental impacts externally.
For example, Cathay United Bank is one of the first lenders to solar and offshore wind projects in Taiwan. We are the first Taiwanese financial institution that vowed to use 100% renewable energies by 2030.
Semiconductors and other high-tech industries are part of our main focus in Taiwan. We also pay attention to high-pollution industries, as they demonstrate great materiality to our sustainability push.
FA: How do you interact with your portfolio companies when it comes to transition? And what are some of the challenges?
Cheng: We work with our portfolio companies, or our investors, as partners on the transition journey, learning from each other. Therefore, an engagement plan is essential when we invest in any company. We have joined that Asia Investor Group on Climate Change (AIGCC), committing to responsible investment.
For example, after the fourth negotiating session of the Global Plastic Treaty was held in April this year, we’ve shared relative information with petrochemical companies in our portfolio, checking their action plans on plastic production and pollution prevention. It is worthwhile acting early by studying the potential impact and to plan in advance.
At the same time, we’re seeing various treaties, commitments, initiatives and programmes, across different sectors every year. From an investor’s point of view, it would be better to have a higher degree of alignment of the rules. In an ideal scenario, non-governmental organisations (NGOs) could work together and align their agendas to tell us, for example, 30 priorities to work on. This would help to avoid an overload of information for the industry.
Data is another prominent challenge in Asia, especially for a specific market like Taiwan, as ESG ratings and other statistics are crucial for investors to benchmark a company.
In Taiwan, we have sponsored National Taipei University to cover over 800 companies in their ESG rating programme. This is also a tool to help companies take actions as soon as possible, instead of using lack of data as excuses.
FA: What has Taiwan’s sustainability progress been, both in public and private sectors?
Cheng: From a regulatory perspective, the Securities and Futures Bureau of the FSC has issued a Corporate Governance 3.0 roadmap on corporate’s sustainable development, encouraging self-enhancement of sustainability commitments, as well as encouraging the development of a sustainable finance market. In May, the FSC also published guidelines to combat green washing by financial institutions, suggesting clearer comparative measures to guarantee fairness and comparability.
By the end of this year, the Ministry of Environment will also introduce its carbon fee programme, levying fees on the power and manufacturing companies with more than 25,000 metric tonnes of carbon dioxide equivalent per year.
On the other hand, the financial industry needs to take a localised approach when looking at sustainability project developments – 61% of Taiwan is covered by forests, meaning there won’t be enough land to build solar panels as a clean energy source.
However, 97% of our energy consumption is reliant on imports, which is heavily impacted by oil and gas price fluctuations. Therefore, we have to think of a way to develop our alternative energy sources, offshore wind being one of the solutions. We are also seeing factories gradually replacing equipment with more energy efficient ones.
FA: What are some other innovative financing solutions or opportunities you are seeing?
Cheng: Blended finance will help mobilise private sector funds through the participation of public money, which dilutes risk factors and increases returns for private investors. Studies have shown that every dollar of public money would be able to mobilise $4 of private funds using a blended financing structure. There are projects globally leveraging the new structure, and I believe Asia is catching up.
We are also looking at different investment opportunities, such as decarbonisation funds, to include in our portfolio. We will prioritise climate-related investment products when considering our strategies over the next couple of years.
In an environment where rates are still relatively high, we encourage people to take more factors into account, other than simply maximising returns. Given similar levels, or even a marginal gap, of different investment products, we would be more willing to give up a small fraction of returns to support environment-related projects and companies, fulfilling the requirements of our clients and shareholders at the same time.
