Global MNCs prepared to pay for carbon

Observers note that smaller businesses, especially in Asia Pacific and Singapore, are not prepared to pay for carbon as financial regulations are still not aligned to factor in the cost of carbon.

Global multinationals have often been criticised for ignoring the costs of climate change, regarding them as externalities not accounted for in their balance sheets.

Today, these companies are singing a different tune, requesting at December’s United Nations climate summit in Paris for carbon to be priced “predictably”, Singapore’s chief negotiator for climate change Kwok Fook Seng said last Thursday.

Speaking at the Tri-Sector Forum organised by the Singapore Management University (SMU), Kwok noted that the companies wanted carbon pricing because they could “perhaps use carbon trading to offset their global footprint, so that they could be carbon neutral in their global operations”.

Carbon pricing is widely seen as a way to get businesses to pay for their environmental impact. According to the World Bank, almost 40 countries have already started to use carbon pricing mechanises, or are planning on implementation.

But criticism that businesses would simply pay to emit carbon, rather than pay attention to limiting pollution, has plagued the debate on carbon pricing for years at UN climate talks. 

After nearly two decades of negotiations, the world’s nations finally agreed to a global treaty to tackle climate change, largely also thanks to the UN’s fifth assessment report, published prior to the Paris meeting, which painted a clearer picture that the world would have to live permanently with climate change even if emissions growth was curbed, noted Kwok.

Simon Tay, Chairman of the Singapore Institute of International Affairs (SIIA),said that while these global MNCs have understood the impact of carbon on their businesses, not enough is being done by the majority of businesses and financial institutions, particularly in Asia. 

He noted that the latest initiative by the Singapore Exchange (SGX) to introduce mandatory sustainability reporting by the end of December 2017 was not welcomed by some independent directors of SGX-listed companies. Some had raised cost issues and questioned the need for sustainability reporting. 

Participants at the forum also shone a spotlight on the role of regulators and bankers in getting companies to adopt sustainability in their business practices through how businesses are funded.

Changing the mindset from a solely profit driven one to one that has sustainability development in its business model, however, is challenging because sustainability issues are still quite new in mainstream banking, with bankers focusing on the global financial turmoil, observed Tay. 

He noted that Basel III, an international regulatory framework requiring banks to have adequate capital to ensure global financial stability and avoid the liquidity crunch as seen after the financial crisis in 2008, has caused long-term capital for environmental projects to be scarce.

As sustainability projects are still new, the perception of risk in green and renewable energies are still high compared with fossil fuel projects that have longer track records, said Kwok.

To counter the financing problem, Tay suggested that private equity could set aside project finances that come with a longer-term horizon to develop infrastructure for environmental sustainability.

Yeo Lian Sim, Special Advisor at the SGX, said companies that tap on the capital market could also be pushed to adopt sustainability in their business practices.

She noted that global investors which have signed the United Nations Principles for Responsible Investing (PRI) now own or manage US$59 trillion of funds. With SGX looking to implement the new sustainability reporting at the end of 2017, investors could also look at information gathered from sustainability reporting to assess the risks involved with the investment.

“If you have information, then those different assessments are being made, different actions are being taken and everybody gets prepared at their own time, with their own risk appetite and then the system as a whole manages more smoothly,” added Yeo.

Speakers at the Tri-Sector Forum, which was attended by about 100 participants, also spoke on the importance of public-private partnerships, known as PPPs, which involve government, the private sector and civil society working together to address the broader developmental objectives in environmental sustainability.

Simon Zadek, co-director of the UNEP Inquiry into the Design of a Sustainable Financial System, said that the diversity of views brought about by PPPs could ensure that financing flows address broader developmental objectives, particularly those in developing nations. 

As an example, Zadek cited how China’s central bank People’s Bank Of China (PBOC) and the UN had brought together a large task force comprising various segments of China’s society to come up with a full set of regulations in the beginning of 2015. This has developed the country’s financial and capital markets with environmental issues, particularly climate issues, in mind.  

“Central banks and regulators in developing nations view the role of the financial sector as one which delivers development, rather than simply another sector that is delivering a product and service,” he said. 

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