‘Building a resilient future that leaves no one behind’: How sustainable financing can drive a just transition

OVER the past week, Singapore was lashed by torrential rain and winds that felled trees. These were brought by the monsoon season but science indicates extreme weather will occur more frequently and with greater severity due to the effects of climate change.

It is clear that the impact of climate change is both far-reaching and wide-ranging. This is especially so in Asia, where the region’s diverse demographics, socioeconomics and geopolitics create a complex tapestry of factors that contribute to how climate change is felt by residents.

Tackling the climate crisis is a critical priority due to its urgency and interconnectivity with other sustainability challenges. However, it is also essential to do so in a just and fair manner that enables current and future generations to live well.

This means being able to put food on the table, breathe fresh air, have fresh water and shelter, access proper medical treatment and keep the lights on.

It is not just about replacing coal-fired power plants with wind turbines and solar panels, but encapsulates the 17 UN Sustainable Development Goals which cut across economic, social and environmental goals and targets. The tricky part is that these different goals are often inter-connected and co-dependent. Tackling these challenges requires Asia to define its own pathways to a just transition. While the process is daunting, there are also plenty of opportunities.

For example, global investment flows that aim to tackle the climate crisis underline the positive momentum behind climate action. In 2024, research indicates that for every dollar invested in fossil fuels, the world will invest US$2 (S$2.60) in clean energy, double what it was just a few years ago. The green economy is also expected to raise global gross domestic product by about 5 per cent by 2050 and add millions of jobs.

Across Asia, sectors such as agriculture, energy generation, transport and mobility, as well as real estate are expected to benefit significantly from the push for sustainable development.

Innovating for a sustainable future

Enabling a just transition will require action to address policy and technology certainty, balance socioeconomic and environmental goals, foster capacity building and talents, and close gaps in the availability of data needed to make well-informed decisions.

We need the entire ecosystem, across governments and regulators, the private and finance sector, to work together collaboratively. The good news is that this is already happening.

For example, Singapore has been hitting far above its weight on the global climate policy stage with numerous initiatives to drive financing, innovation and the scaling of new technologies, in order to accelerate a just transition.

Since 2020, there has been a 50 per cent increase in Asian firms joining the Science Based Targets initiative, setting ambitious and science-informed emissions reduction goals aligned with the Paris Agreement.

Financial innovation for a just transition

Beyond regulatory certainty, banks and capital markets investors also need to focus on financial innovation to create compelling risk-reward profiles for new investments. Banks like DBS must take an active approach to develop financing solutions to meet the evolving needs of clients and help them unlock opportunities in the transition. Balancing long-term environmental benefits with competitive returns is key.

One example of an innovative financial mechanism that can help address the climate crisis is carbon credits, which can be an efficient way to mobilise and channel financing directly to projects and communities in situ.

Benefits aside, carbon offsetting can be controversial. There is concern that carbon credits from poorly managed projects can overstate the offsetting activity, reducing the pressure for gross decarbonisation. Hence, we believe that carbon credits need to be seen as one of many tools in the kit, which is informed by a credible and science-informed decarbonisation strategy.

Against this backdrop, DBS set out to deliver a suite of carbon credit-related financing and hedging solutions to help a growing cadre of companies effectively access the European Union (EU) carbon market, which recently extended its coverage to include shipping companies outside of the EU.

Estimates indicate that Asian shipowners are projected to spend over one billion euros (S$1.44 billion) annually by 2026 on EU Allowances, with those in Singapore and China expected to pick up the bulk of the tab. DBS is the first South-east Asian-headquartered bank to offer solutions catering to one of the largest and most mature compliance markets in the world.

By strategically directing our financing towards transition activities, we – alongside the rest of the financial sector – can tilt the cost of financing and change the relative economics of investing in fewer carbon-intensive activities. When complemented by policymakers and regulators establishing conducive frameworks, this presents a powerful lever to incentivise corporates to innovate and scale decarbonisation solutions.

Decarbonising the real economy

We need to be conscious that the vast majority of our economies, over 90 per cent, are not yet green. Hence, we need to focus on those parts of the economy that could become green over time with the right efforts and innovation. This will require novel financing known as ‘transition finance’.

Transition finance is any form of financial support that helps decarbonise high-emitting activities or enables the decarbonisation of other economic activities. It is also aimed at addressing the potential social impacts of decarbonisation, including unemployment and loss of tax revenue for local governments.

However, the world has not yet come together to define the qualities of a credible transition finance deal. In this regard, Asia, including Singapore, is taking a leading role.

Efforts such as the Asean Taxonomy for Sustainable Finance, as well as the Singapore-Asia Taxonomy are examples of frameworks that help financial institutions to channel capital towards more sustainable and transition activities. Closer to home, the Singapore Sustainable Finance Association (SSFA) has identified five priority areas to accelerate transition in the real economy. DBS co-leads the SSFA Transition Finance Workstream.

In addition to financing, decarbonising the real economy will also require plugging the talent gap in the sustainability sector. In addition, government and industry have a shared responsibility to help workers find their place in a low-carbon future by re- or upskilling individuals.

Collective action and shared accountability

Over the past 10 months, there has also been an increase in the number of global and regional workgroups, industry task forces and public-private partnerships geared towards creating a sustainable future.

At DBS, we support these global and regional efforts by actively shaping initiatives across a large number of government, regulatory and industry working groups. Our advocacy efforts focus on key areas such as supporting the transition; building sustainability-related skills; enhancing reporting and disclosure. For example, DBS is the only representative for Asia-Pacific on the technical committee of the Global Reporting Initiative that currently develops a reporting standard for banks, a global first.

Supporting a just transition demands a complete rewiring of our economies, underpinned by strong partnerships between governments, regulators, financial institutions, businesses and communities to drive collective action.

While no one can do it alone, everyone has a shared responsibility.

This article was written by DBS chief sustainability officer Helge Muenkel.