Singapore: (Not yet) a rising green finance hub

The finance centre of Southeast Asia has declared ambitions to become a hub for sustainable finance, but how much progress has it made? NUS’ Jacqueline Tao investigates.

The objective of the global green finance movement is clear: to provide the full range of financial services and products to support the transition to a low-carbon world.

Two distinct approaches seem to have emerged, with one focusing on fund mobilisation, and the other targeting risk management. The first places focus on the promotion of an adequate flow of capital towards activities and projects that address environmental and climate concerns through product innovation and new instruments.

Such ideological underpinnings are the key catalysts for the growth of green securities, green credit and green insurance. The fund mobilisation approach recognises the urgency of the green transition, and aims to reward green (either directly through pricing advantages, or through the green halo effect) to expedite investor action in the short run.

The risk management perspective places focus on the potential for environmental and social risks associated with climate change. Climate change is likely to bring about new risks to economies. Some risks are associated with actions to combat climate change (transition risk) such as the stranding of high-carbon fossil fuel assets, and others can be attributed to the effects of climate change (climate change risk).

Climate change risk may manifest in a multitude of ways in the real economy. For example, a chocolate company may face supply chain risks when extreme weather events threaten cocoa production in their supplier countries. An ice cream company may face market risks if a particularly cold summer causes severe drops in their ice cream sales. Such risks should be adequately quantified and managed to ensure the sustainability of business models to climate change effects.

Perhaps a harder to comprehend but extremely critical risk to consider would be how material risks to an economy could cascade into an international financial crisis due to the high interdependencies of the global economy. One only needs to recall the subprime crisis of 2007/2008 and the extended global recession in the aftermath to have an idea of the potential extent of damage.

An added dimension would be the additional costs associated with an abrupt change in policy or market sentiment. An overnight shift in policy, reminiscent of the rush to phase out nuclear energy in Germany in the wake of 2011’s Fukushima accident, is likely to see the affected scrambling to respond. Contrast that with a smooth and managed transition into a low-carbon world, which is likely to come at a much cheaper cost.

Thus, our best option now is to start our journey towards a smooth transition to a low-carbon and sustainable economy, which could be done by better acknowledging and managing climate change risks by integrating environmental, social and governance (ESG) principles into our day-to- day risk management process.

However, making such fundamental changes to how we view risk is likely to take time. Thus, the dual approach of green finance complements each other as both working towards redirecting financial flows towards environmentally sustainable actions.

Singapore’s green finance efforts

The Singapore approach to green finance seem to embrace both the approaches mentioned above. The Monetary Authority of Singapore (MAS) has been taking a leadership position in ensuring sustainability factors are included in their supervisory efforts of the financial sector in Singapore. Furthermore, it has also stepped in to kick-start Singapore’s green bond market with the Green Bond Grant scheme, with the 100 per cent reimbursement of the additional costs (up to $100,000) of obtaining an external review of a green bond.

The scheme has achieved relative success, with a few big names throwing their hat in the green bond issuance ring. These institutions include City Developments Limited, DBS Bank and Manulife Financial, all of whom issued green bonds in 2017. Despite the relative successes with the Green Bond Grant scheme, it also faces critical challenges. SMEs remained locked out from the green bond issuance process due to stringent requirements of a bond issuance process.

This is an opportune time to look inward at the exposure of our financial system—particularly our banking system—to assess our vulnerabilities to climate change risks and integrate ESG frameworks into our risk management processes.

In the equity field, the Singapore Exchange (SGX) implemented a “comply or explain” policy on ESG reporting for all listed companies, starting in 2018. This policy will hopefully motivate companies to actively monitor and benchmark their sustainability practices.

Banks in Singapore have also made much progress since the dark days of being named the laggard in sustainable finance compared to our Indonesian and Malaysian peers in the released by the WWF in 2015. The Association of Banks in Singapore (ABS) spearheaded Singapore’s move towards green credit by issuing the Guidelines on Responsible Financing in 2015. Since then, Singapore-based banks have seen marked improvements, with progress attributed to the active leadership of MAS, ABS and SGX.

Playing catch-up

Despite the recent progress on green finance, it may still be a long way to go before Singapore can emerge as the green finance champion of the region. One of the immediate opportunities before us is the potential to capitalise on regional developments to further deepen the green bonds market. DBS estimates that ASEAN requires around US$3 trillion of additional green investment till 2030.  

Perhaps this is also an opportune time to look inward at the exposure of our financial system—particularly our banking system—to assess our vulnerabilities to climate change risks and integrate ESG frameworks into our risk management processes.

Banks may consider conducting environmental stress-testing, or climate policy stress-testing, on their portfolios to help them better understand their exposures.

Lastly, while global movements such as the Principles for Responsible Investment (PRI) and Equator Principles are increasing awareness about green investments, giving rise to a small, but growing number of specialised green funds, such shifts in investor behaviour are not seen in Singapore.

The challenge for Singapore is not the lack of awareness, but the difficulty of translating awareness to action. Educational campaigns aimed at empowering not only investors, but also citizens, to act upon their climate change concerns may be more effective in nudging companies and financial institutions to embrace sustainability.

Public campaigns aimed at empowering citizens to tackle climate change as part of the 2018 Year of Climate Action for Singapore may do more to push individuals and institutions to adopt a proactive approach towards sustainability.

Jacqueline Tao is a Research Associate at the Energy Studies Institute at the National University of Singapore, and Gautam Jindal is a Research Associate at Energy Studies Institute, National University of Singapore. This article has been written exclusively for Eco-Business.

 

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