Powering Singapore's growth through green finance

Simon Tay and Yeo Lian Sim Straits Times 23 Dec 17;

President Donald Trump has withdrawn the United States from the Paris Agreement for fear that it gives the world's top polluting countries an edge over his country. Others, like the European Union and China, however, remain committed to combating climate change and are taking the lead. Singapore is joining those who will move ahead.

At the UN Climate Change Conference last month in Germany, Singapore Minister for the Environment and Water Resources Masagos Zulkifli announced that Singapore will designate 2018 as the Year of Climate Action. This underscores a raft of measures implemented over the past two years.

One key step will be a carbon tax imposed from 2019 on large direct emitters of greenhouse gases. The exact amount of tax is not announced but it is expected to steer companies towards greater energy efficiency and lower carbon emissions. This follows moves by the Singapore Exchange (SGX) to require all listed companies to report according to its sustainability reporting guidelines on a "comply or explain" basis.

A United Nations-backed network of investors has also released new voluntary climate-related indicators that are aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The task force was set up by the G-20's Financial Stability Board to provide guidelines that will help in the assessment and pricing of climate-related risk and opportunities.

Climate change has become an issue for both environmentalists and businesses.

Financial institutions here are doing their bit. Besides the guidelines on responsible financing introduced by the Association of Banks in Singapore in 2015, Second Minister for Finance Lawrence Wong also announced last month that the government will push for deeper environmental, social and governance (ESG) integration within financial institutions.

ESG is a term used by investors and capital markets to evaluate corporate behaviour and to determine the future financial performance of companies based on their performance in areas such as environmental sustainability.

The Monetary Authority of Singapore is also including sustainability as an aspect of its supervision of banks.

Collectively, these are strong signals of the shift towards sustainable development. Even as some companies are concerned with the additional costs, time and paperwork associated with sustainable reporting, business opportunities also abound.

Take green finance, for example. The idea of green finance - channelling capital to sustainable industries, companies and projects - is already gaining significant momentum in the West and among major Asian economies.

China emphasised green finance in its 13th five-year plan (2016-2020) as playing an important role in the country's new model of development and growth.

During the recent 19th National Congress of the Chinese Communist Party, Chinese President Xi Jinping stressed that the country must seek a model of sustainable development characterised by higher production, better living standards and healthy ecosystems. Already, five provinces have been identified as pilot zones to promote green finance.

Japan is also making headlines with its move towards greener investments. Its Government Pension Investment Fund - one of the world's largest and most influential pension funds - announced in July that it would raise its allocation of environmentally and socially responsible investments from 3 to 10 per cent.

Closer to home, Asean presents various opportunities. A study by DBS and the UN Environment Inquiry highlighted that US$3 trillion (S$4 trillion) in green investment is needed between 2016 and 2030 across infrastructure, renewable energy, energy efficiency and food, agriculture and land use.

Green finance offers a means to ensure that these projects are not only economically viable in the long term, but also remain well integrated and accepted among the local communities.

Currently, Singapore lacks a strong and established green finance market. Some remain suspicious about "green washing", when companies or investment funds only appear to be environmentally beneficial.

Instruments that provide information regarding the long-term environmental impacts of green projects are still underdeveloped or in their infancy.

Other players across banks, insurance companies and institutional investors have recognised the untapped opportunities and ventured into green finance, resulting in multiple shades of green.

Local banks today are more explicit in integrating minimum ESG standards in their financing processes. Forums on sustainable investments have emerged, including those led by asset management firms seeking to generate interest and demand. Most insurers, however, still have some way to go.

Such diversity is to be expected at this early stage. There are differing levels of will and capacity, as financial institutions react to different factors. Overly rigid definitions and rules that limit adoption and innovation should be avoided. Instead, having a "band of green" definition can be positive for more institutions to explore green finance's potential and develop leading-edge green products and services.

NEXT STEPS FOR SINGAPORE

To combat climate change and develop Singapore as a green finance hub, a collaborative effort among governments, financial institutions and businesses is essential. Key initial steps are needed to jump-start a green finance market and investments.

First, defining the value of green is critical. Such information is important so that financial institutions and corporations start to recognise the value of green and measure its impact on business and investment. This should be aligned with global standards and practices. Wilmar International, for example, became the first palm oil company to link the interest rate of its bank loan to its sustainability performance.

Greater clarity over what is green will start to emerge as larger companies and small and medium-sized enterprises start to disclose their ESG performance.

The availability of material data supports and adds to the value of green. It also addresses the problem of green washing by making sure that investors are more discerning about the quality of projects or financial instruments they are investing.

Moreover, institutional investors, especially large, influential or government-linked investors must be incentivised to increase their portfolio of green investments or establish "green pockets".

Having a green mandate creates strong demand for green opportunities, creating a ripple effect throughout the value chain in terms of new product creation, as well as skills development.

The world seeks a shift towards sustainability in response to concerns over climate change, and so must Singapore, more so now than ever before. This is not only for the country's future, but also to support the growing needs of the South-east Asia region that it serves.

As one of the world's financial hubs, Singapore can and should make green finance its next step.

Simon Tay is chairman of the Singapore Institute of International Affairs and Yeo Lian Sim is special adviser on diversity at the SGX and vice-chairman of the TCFD. Both authors are also co-chairmen of the Collaborative Initiative for Green Finance in Singapore, which led to the launch of the report "Singapore as a Green Finance Hub for Asean and Asia" at the G-20 Green Finance Conference in Singapore.