Today, the world is adrift, racing rapidly towards a green economy. The areas of finance and investing are part of this shift as more parties join the effort to help make the globe a better place for all. Here is all that you need to know about green financing and its application in Singapore.
Green Finance Defined
Green finance is a broad term used to mean financial services and products available for project operation, investment, financing, and risk management in clean energy, energy efficiency, environmental protection, and green logistics. It also encourages conservation of resources, response to climate change issues, and environmental improvement.
To put it differently, green financing entails using the traditional capital markets to generate products that deliver impressive returns on investment and promote sustainability.
The United Nations Environmental Program (UNEP) indicates that green financing is aimed at raising the level of capital to the areas that prioritise sustainable projects. Therefore, green financing investors are sure of enjoying returns on the environment and promoting operations in an environmentally friendly way.
Green Financing Classification
- Green bonds and loans: The goal of these is that the bonds or loans can only be used for eco-friendly purposes.
- Sustainable-linked bonds and loans: These financing categories tie some terms and conditions for the loans and bonds to the sustainability performance of the borrower. In most cases, the sustainability considerations are predefined.
The above two are not the only forms of green financing. Other options include sustainable securitisation, green asset financing, and green credit cards. As you can see, the idea of green financing is not new because some financial institutions have been using them for more than ten years.
For example, the World Bank has been issuing green financing through bonds since 2008 to help promote sustainable investing. However, green finance gained more traction in 2015 when the Paris Agreement and Sustainable Development Goals became more prominent.
Estimates for Green Financing
Now, the idea of Green Financing has gained traction and reached approximately US$35.3trillion. It was one of the agendas in the 26th United Nations Climate Change Conference of the Parties in Glasgow.
Taking a closer look at the implementation, Asia has done pretty well in advancing the idea of green financing. This focus is expected to grow further in the coming years as more countries in Asia target “net zero” goals and amplify their focus on decarbonising their economies.
In Asia alone, it is estimated that an annual investment of US$ 1.5 trillion is required for the SDGs to be achieved by 2030. One-third of this money is targeted for climate change and clean energy-related actions. So, let's look at the specific jurisdictions:
- The bulk of green financing demands are being pushed by the large economies in Asia, especially Japan and China.
- Between 2019 and 2020, Japan more than doubled the issuance of green bonds
- Between January and March 2021, China issued US$ 15.7 billion worth of bonds to support clean energy.
- It is estimated that China will need about US$ 21.33 trillion to achieve its carbon neutrality goals in the next four decades (Investment Bank China International Capital Corp).
- In Singapore, a country with the bulk of its land mass located less than 15 meters above the sea level while 30% is below five meters, the jurisdiction’s administration looks at the risks of climate change seriously. It is always searching for more innovative solutions to address them.
Singapore Green Financing: What are the Available Options?
Recently, the Minister of Finance in Singapore, Mr. Lawrence Wong, announced that the country wants to be a pacesetter in green financing during the inaugural Singapore Sustainability Investing and Financing Conference. This message was a clear signal that the country is willing to put more focus on green financing. He added that Singapore has established a Green Bonds Program Office to work with other statutory bodies for related programs and to manage investor relations.
The announcement by Mr. Wong follows the recent issuance of US$ 1.23 billion by the National Environmental Agency (NEA). Proceeds from the bonds will be used to fund current or new projects in sustainable waste management. This issuance falls under the NEA’S larger US$2 billion green bond framework started earlier in August 2021. The design of the Green Bond Framework of Singapore is guided by the Green Bond Principles of the International Capital Markets Association, which has the following four important components.
- Clear process for the selection and evaluating projects
- Use of the generated proceeds
- Proceeds management
The Green Bond Framework of Singapore also outlined the criteria for interested parties to qualify for NEA proceeds. For example, the respective projects must include the component of sustainable waste management, highlighting construction, operation, capacity building, and management of infrastructure. Specific activities include:
- Food waste treatment must focus on treating food waste into high-quality pulp.
- Sludge incineration that delivers more than 70% efficiency.
- Waste-to-energy that delivers waste-to-energy efficiency of more than 26%.
- Waste recovery that includes collection and sorting.
- Waste processing and recycling.
One of the projects that met the strict criteria was the Tuas Nexus Integrated Waste Management Facility. It has two units: one for water reclamation and another for integrated waste management. Therefore, the project is the first of its kind in Singapore because it integrates water treatment and waste treatment. Their commercial operation is expected to start in 2025.
The NEA’S Green Bond is not the first one in Singapore. Another green bond was issued earlier by Sembcorp Industries in June 2021 under the Climate Bonds Initiative (CBI) and Climate Bonds Standards. CBI is a global not-for-profit organisation designed to mobilise capital markets for all, for the entire US$100 trillion bond market. The focus is creating climate solutions through three main work streams:
- Market intelligence
- Policy model and advice
- Trusted standards development
By following the Climate Bonds Standards, bond issuers get and use the Climate Bonds Certification Mark to win investor confidence. To achieve this certification, the issuer must get a third party that is “Approved Verifier” to confirm that all the Climate Bonds Standards are met.
These recent developments in green bonds demonstrate the desire of Singapore to pioneer this space. In the first half of 2021, about USD 45.21 billion bonds were issued in Singapore and the trend is expected to continue.
Singapore Green Plan 2030: What Role Does Green Financing Has to Play?
The commitment to green financing is anchored in the Green Plan 2030 and further under the pillar of Green Economy. Therefore, the Green Plan is a comprehensive sustainability movement used to advance the country's national agenda on sustainable development. Here are the main areas of focus in its target of promoting a Green Economy.
- Introducing Enterprise Sustainability Program to assist businesses adopt sustainability capabilities.
- Develop business and job opportunities in areas of sustainability consultancy, green finance, and credit trading.
- To become a leader in the field of green finance in Asia and across the globe through the development of resilience to different areas, such as creating green financial solutions and leveraging innovation.
- Promoting homegrown solutions via innovation, research, and Enterprise Plan of 2025. Also, they target encouraging companies to help attract more green activities in Singapore and related sustainability solutions.
To achieve these targets, Singapore has proposed a number of initiatives, including the Green Finance Action Plan. This plan was started in 2019 and developed by the Monetary Authority of Singapore. Part of the plan’s target is addressing the environmental risks in the country and mobilising capital towards a sustainable economy. It also aims at encouraging FinTech Innovation.
Here are the six main areas to be used in implementing the Green Finance Plan.
- Grant schemes for supporting sustainability loans.
- Promoting Environmental Risk Management Guidelines in insurance, banking, and asset management.
- Creating a US $2 billion Green Investment Program with the commitment of promoting the country’s.
- Supporting the Centers of Excellence with global study firms and leading universities to advance Asia-focused on sustainability-related training programs.
- Making Green Financing part of the benchmarks for economic growth.
How to Deal with Greenwashing
Although there is huge potential in green finance, there are a number of pitfalls in the sector, and the most notable is greenwashing. It is a practice where an organisation presents itself to be environmentally friendly, whereas it is not. Even when some efforts on sustainability have been made, some businesses report they have achieved more to paint a different picture to stakeholders. Here are some of the activities that can be labeled greenwashing.
- Using false labels: This means labelling products with certifications that are not legitimate in order to mislead customers to believe they have been vetted and won tags, such as eco-preferred and eco-safe.
- Hidden trade-offs: Some firms create the impression that they are eco-friendly but practice unsustainable trade-offs. For example, a company might label products green on the basis of a narrow set of attributes without paying focus on other parts, which might be damaging the environment.
- Claims that are irrelevant: These are claims that might be true but not helpful for clients targeting products that are eco-friendly. For example, if a company works in a country where CFC is banned, indicating that a product is "CFC FREE" will not be very helpful.
- Less harmful: Also referred to as the “lesser of two evils,” this type of greenwashing happens when claims on environmentally friendly products are made to distract clients from the fact that the harm still looms. For example, the use of the terms "organic" and "green" have often been considered greenwashing for companies that have questionable environmental focus or value.
- Lack of proof: This is any environmental claim that cannot be proven using verifiable information. If a company claims that a light-bulb is energy efficient but does not provide supporting info, that is considered greenwashing.
Singapore appreciates that greenwashing poses a serious threat to the realisation of sustainability and green finance initiatives. To address this, Wong indicated that they are pushing for standards that should be applied in all industries.
Furthermore, environmental, social, and governance investments are taking roots, helping firms to create their own path for sustainability. The three main areas where Singapore is focusing on curbing greenwashing include:
- Taxonomy: This is a checklist for all financial institutions that set conditions for any activity to be considered sustainable. The strategy is borrowed from the European Union (EU), where the idea of taxonomy came into place in July 2020. Once installed, it will be very difficult for companies to greenwash because every product or activity will be counterchecked.
- Data: The focus is to ensure that the data provided by companies is correct, verifiable and easy to understand. Currently, efforts on ensuring data provided to prove sustainability commitment are mainly in ESG reporting. However, most of these are voluntary and concerns have been raised about some companies' reports because the information is not enough, it is shallow, and not verifiable.
- Disclosures: This consideration aims at building on the gains made on ESG reporting and targets to ensure that companies make all the disclosures about their activities, products, and services. The goal is to ensure that the image presented forth about a company can help targeted investors and other stakeholders to make the right decisions.
The Bottom Line
The push for green finance is gathering pace in Singapore and a wide range of new developments is expected in the coming months and years. At the height of the COVID-19 PANDEMIC, most industries in other niches appear to have been affected negatively, but green finance thrived.
Singapore is determined to become a pacesetter in the area of green finance and as we have demonstrated, is taking huge strides towards that. One of the major methods of achieving the target is identifying and eliminating greenwashing. The good news is that Singapore has long established itself as a financial hub, and it has already set a trusted and transparent system. Therefore, the country is well-positioned to address the challenges of greenwashing and many others and become the green finance giant it aspires to.
Our view is that green finance is going to play an important role in driving the economy of Singapore to the next level.