10 April 2020

How to drive critical mass in green financing within Singapore

A green taxonomy is needed so that everyone in the ecosystem is talking to the same language and working towards the same environmental objectives.

Frances Chen

Head of Corporate Sustainability, HSBC Singapore

In his 2019 National Day Rally, Prime Minister Lee Hsien Loong cited climate change as one of the "gravest challenges facing humankind."

From Prime Minister Lee’s words, there is serious intent but given the vastness, complexity and reach of climate change, it can be very overwhelming for any nation, entity or individual to embark on efforts to combat the phenomenon.

So how can a thorny and complex topic like onboarding businesses to mitigate climate change reach critical mass in Singapore?

From a finance perspective, here are some practical suggestions.

Get some common language on what ‘green’ actually is

Being ‘green’ is the modern-day tower of Babylon, where everyone is talking in different languages.

Investor appetite for green products is growing – in an HSBC survey conducted in 2019, 63% of our investor clients said they would enter or expand their presence in green finance over the next two years1. However, there is uncertainty as to what is considered “sustainable" or “green" across different sectors. Similarly, we have corporations disclosing Environmental, Social and Governance (ESG) performance data but not sure whether the information disclosed meet investor needs.

What is needed is a green taxonomy so that all involved in an ecosystem - consumers, investors, regulators, companies, financial institutions – can be sure they are talking the same language, working towards the same environmental objectives, and are measuring actions and performance against the same criteria.

Jurisdictions, like the European Union (EU) and China, have issued taxonomies on defining economic activities that are considered ‘green’ or key to enabling ‘green’. For example, a gas-fired power plant in the EU can only be defined as ‘green’ if it emits life-cycle carbon emissions below a set hurdle, which declines overtime to align with EU’s 2050 Net-Zero ambition. Malaysia is another jurisdiction taking such approach, with Bank Negara Malaysia issuing a principle-based taxonomy discussion paper for public consultation last December. Bodies like the International Organisation for Standardisation (ISO) are also developing a taxonomy for its standards around green debt instruments. 

Rather than reinventing the wheel, Singapore could look to take on these existing standards and contextualize them for the Republic, or for Southeast Asia more broadly.

Mobilise financial institutions to more strongly factor green into their risk management frameworks

To mobilise companies, we first need to mobilise the banks and financial institutions.

More specifically, that means ensuring that banks provide greater consideration and transparency in how they assess environmental risk, including climate risk, across their lending portfolios. This will, in turn, influence the behaviour of corporate borrowers who seek funding.

This is currently in train. The Monetary Authority of Singapore (MAS) will publish draft Environmental Risk Management guidelines across the banking, insurance, and asset management sectors for public consultation this year. These guidelines will set standards on governance, risk management and disclosure for financial institutions when dealing with environment risk. The MAS is also working on incorporating climate risks in a future industry-wide stress test, requiring financial institutions to better understand and account for the financial impacts that climate change can pose to the industry.

We expect this to enable companies to better understand the type of data financial institutions may require to assess and manage environmental risk.

Get Singapore’s preeminent institutions to lead the way in green financing

Because green financing is still a relatively new concept, especially in this part of the world, achieving wide-scale green financing adoption - within any country - is like trying to finish a jigsaw puzzle without having the back-of-box picture to guide you.

That’s the challenge that all countries face right now, including Singapore. Many of the pieces needed to achieve critical mass in this space are already in place in Singapore, including having the sufficient depth of liquidity, and incentives designed to remove the perceived extra cost and effort of issuing green, sustainability and social bonds.

Similarly, issuing of sovereign and statutory board green bonds in Singapore in areas like transport and housing – which has yet to happen - can also be seen as other important pieces of this puzzle.

Our experience of issuing sovereign green bonds across several European and Asian nations is that it provides the platform to have a granular conversation with stakeholders on topics like climate change, water renewal and preserving of finite resources.

Investors want to understand what their money will be used for, and when we’ve helped issue government-linked green bonds in the past, the conversations with investors is not around the credit structure or credit-worthiness of the bond, but instead around the use of proceeds. That’s an extremely powerful conversation to be having, and it goes a long way to driving and shifting the thinking and behaviour amongst other potential issuers and the wider community. It sends a clear market signal on the type of green assets that the government looks to finance, which in turn will motivate more corporations to become suppliers, or even demanders, of such assets. 

Make green finance solutions more accessible and to a wider section of business and society

Another issue is that a lot of the financial instruments are targeting the big end of town. There are fewer options for smaller corporate players or retail investors, who are essential players in the development of a green finance ecosystem.

The good news is that we’re starting to see that change, with the introduction of solutions aimed at the smaller end of the ecosystem. For example, HSBC Singapore recently launched both green loan and deposit solutions for small and medium-sized enterprises. In Hong Kong, HSBC has also launched Asia’s first green retail Certificates of Deposit for retail customers where the deposits will go towards financing sustainable projects as set out by HSBC’s green framework.

Conclusion

To keep average global temperature rises to below 2 degrees, Celsius compared to pre-industrial times, the world needs roughly US$6-8 trillion of investment per year by 2030. However, HSBC estimates current total investment to be only US$1 trillion per year at the very best1.  That money needs to flow into almost every economic sector to create substantial change, especially sectors that would enable or contribute to mitigating climate change.

You may ask what role a small country, such as Singapore, can play in addressing these global issues.

The answer is that Singapore does and should have a voice: it is one of the world’s leading financial capital, as well as a trade and wealth hub and home for many multinational corporations’ regional offices. If Singapore gets things right, this would provide a springboard for the rest of the region to leverage and advance their fight against climate change. More importantly, Singapore has the desire and ability to deliver, signaled by the Republic’s recently announced Budget 2020 and enhanced climate pledge under the Paris Agreement. Seen in this light, Singapore is a very important change agent.

A contribution piece by Frances Chen, Head of Corporate Sustainability, HSBC Singapore. A version of this piece was first published in The Business Times on 9 April 2020.

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