MAS to set guidelines on credible transition planning
New association to guide voluntary carbon markets, transition finance, and blended finance also announced
Wong Pei Ting &
Janice Lim
THE Monetary Authority of Singapore (MAS) announced on Thursday (Jun 8) that it will set up supervisory expectations to steer the transition planning of financial institutions, to facilitate credible decarbonisation efforts by their clients.
The Singapore central bank’s guidance will cover financial institutions’ governance frameworks and client-engagement processes to manage climate-related financial risks, and to enable a transition in the real economy towards net zero.
This means financial institutions would not have to feel pressured to indiscriminately de-risk from particular sectors as they track their financed emissions – those greenhouse gas emissions linked to their lending activities. They may instead assess their clients’ transition plans and provide the needed financing for transition where the plans are credible, MAS said in a statement.
MAS chairman Tharman Shanmugaratnam, homing in on the point in his speech at the Financing Asia’s Transition Conference, said that financial supervision is required if carbon taxes do not rise to adequate levels globally without lots of free riders.
The conference was on the programme of Ecosperity Week, the flagship event of Singapore investment company Temasek focusing on sustainable development.
By financial supervision, Tharman was not just referring to the business of ensuring that the risks on financial institutions’ balance sheets are mitigated. “We are trying to mitigate what is coming in the future.”
A NEWSLETTER FOR YOU
Friday, 12.30 pm
ESG Insights
An exclusive weekly report on the latest environmental, social and governance issues.
“We have to think about financial regulation and supervision, as part of the arsenal of public policy required to bring forward actions to avoid catastrophe, not merely as tools to deal with the risks on today’s balance sheets, in today’s financial institutions.
“If it’s just about today’s balance sheets and today’s financial institutions, quite frankly, most of the assets don’t have durations of more than three to five years. There isn’t that much climate risk in it.”
Pointing out that the political economy is holding back the rollout of carbon taxes, he said financial supervision, as an alternative, can come through a disciplined framework within which central banks and financial regulators are cushioned from the politics of the day and the rest of the government.
SEE ALSO
This is important also because, if left to act based on their usual remits, central banks, financial regulators and financial institutions will be “plodding away through micro-measures and missing that big picture”, he said.
As Singapore acts, financial supervisors of other jurisdictions should also level up by thinking long term. “It’s no point saying 20 or 30 years from now, that yes, the world got fried, but we stuck to the independence of financial regulation and supervision,” quipped Tharman, who is also Senior Minister.
Financial institutions told The Business Times that they welcome MAS’ move to develop guidance on transition plans.
One important area that banks are seeking clarity on is how their financed emissions might increase in the short-term when financing energy transition activities.
Mike Ng, head of sustainable office for global wholesale banking at OCBC, said that this is a key consideration for financial institutions that have made net-zero commitments. The guidance would provide greater clarity on how they review their sustainable financing efforts and engagement with clients.
Helge Muenkel, chief sustainability officer at DBS, said that the guidance should also set in place guardrails for how banks can balance the twin priorities of reducing financed emissions and financing real world decarbonisation.
Eric Lim, chief sustainability officer of UOB, suggested that one way to do that is for the guidance to include policies for the transition of the real economy that would complement MAS’ expectations for the banks.
Sectoral decarbonisation pathways and country decarbonisation pathways would also be equally important, he added.
Some components that should be included in financial institutions’ transition plans include their net-zero objectives, implementation and engagement strategies, the governance structure supporting the implementation, as well as metrics and targets to monitor progress, said Kelvin Tan, head of sustainable finance and investments for Asean at HSBC.
These components were in a set of voluntary guidelines published last November by the Glasgow Financial Alliance for Net Zero. Tan disclosed that HSBC will publish the bank’s first climate transition plan later this year.
New association, collaborations
At the event, Tharman also announced that MAS will work with the financial industry to set up an association aimed at developing voluntary carbon markets, transition finance and blended finance. The Association of Banks in Singapore will take the lead in the institution, to be called the Singapore Sustainable Finance Association.
Representatives from financial institutions, financial industry associations, relevant corporates and service providers such as ESG (environmental, social, and corporate governance) rating agencies will be part of the association.
In addition, MAS and government agencies will collaborate with industry players, such as Singapore-based infrastructure financing vehicles Clifford Capital and Pentagreen, to explore platforms to channel blended finance (a mix of private and public funds) at scale into transition and green-infrastructure projects in the region, he said.
MAS said that this aims to bring together patient, concessionary capital from philanthropies, multilateral development banks, development finance institutions and donor partners. These will, in turn, help to crowd in more conventional infrastructure financiers, including banks and institutional investors.
‘Practical ambition’
Tharman stressed the importance of finding a new way of thinking around the climate conundrum, which involves fundamental solutions “acted on quickly, but with practical ambition”.
Much of the views in Asia and the world fall between two extremes, and “not enough in the middle”, he said. On the one hand, one camp is calling for a hard stop to coal financing, a stance he described as “impractical ambition”.
On the other hand, there is a dominant attitude among companies and policymakers who call for a delay of climate action, saying: “I first need to grow, I first need to feed my people. Let’s grow first. Let other countries do the big adjustments. I will catch up later.” This camp shows a lack of ambition, he said.
Both stances will bring “disastrous” outcomes, he said: “Both are going to lead to us crossing those tipping points which have imponderable consequences, very likely catastrophic consequences, which might come earlier than we think.”
A critical part of “practical ambition” would entail working out a plan for the managed phasing out of Asia’s relatively young coal-fired power plants, he said.
He cited the Just Energy Transition Partnership initiatives adopted for Indonesia and Vietnam as the right approach, but said they are “too slow” and “too clunky”. He added: “We really need to speed this up. And that’s why this should be Exhibit A when we talk about blended finance.”
He added: “It does require concessional capital. It does require different tiers of risk appetite, and we have to bring them together in order to manage this phase-out and not keep kicking the can down the road.”
Commending the Asian Development Bank for coming up with its market-based energy transition mechanism aimed at enabling a viable and just transition for coal, he said renewable and grid investments and the managed phasing-out of coal have to be done in tandem. “It’s not one or the other,” he noted.
In this regard, Singapore is looking at the feasibility of incorporating high-integrity carbon credits to widen the range of mechanisms to enable the early phasing out of coal-fired power plants, Tharman said. “We know there are problems around greenwashing. We know there are some perception problems, but there is room to develop a market for high-integrity carbon credits, and I should say: ‘Let’s go about it with great energy’.”
He concluded: “Nothing we do is going to be perfect, pure, or immune to shortfalls that can be criticised. But let’s not let the perfect be the enemy of the urgent and necessary.”
For one, stakeholders can create momentum through successful blended-finance projects, even if the model cannot be applied to address the problem at a large scale immediately, he said.
Copyright SPH Media. All rights reserved.
