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Green drive will hit fossil-linked assets; banks need to get ready

Guidelines in the works for banks to act on such climate change risks to assets

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"We want the financial sector to be at the forefront of this change, to nudge the real economy in that direction," says Mr Menon.

Singapore

AS climate change takes its toll, banks will face the value deterioration in certain assets to which they are exposed. To prepare for this, Singapore is expected to put out guidelines on environmental risk management for the financial sector.

This comes as the Singapore regulator also sees opportunities for the financial sector to "nudge" the real economy towards becoming more green, with the Monetary Authority of Singapore (MAS) likely to dole out more incentives on this front, said MAS managing director Ravi Menon.

"We want the financial sector to be at the forefront of this change, to nudge the real economy in that direction," said Mr Menon in an interview with The Business Times. "We don't want a situation where the financial sector is lagging."

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In greening the financial system, there are threats as certain assets anchored in the old world of heavy fossil-fuel dependency will be rendered less valuable. Climate change may physically further hurt these assets.

Meanwhile, technological advancements would change the costs and benefits of tapping on renewable energy, instead of traditional fossil fuels.

"There is a growing recognition that climate-related risks are going to be a more important consideration, going forward. So we need to build up financial institutions' capabilities to manage climate-related risks," said Mr Menon.

"This is going to be an area of deep flux. Some carbon-intensive assets are going to be stranded as carbon taxes rise or renewables technologies become more viable, while assets that are more environmentally friendly may gain in value."

Insurance companies and banks need to understand the risks that climate change poses on assets, disclose these risks, and then take mitigation action against these risks, said the MAS chief, calling this an active agenda for the Singapore regulator and the industry now.

He added that existing sustainability reports are but a start. He also pointed out that sustainability risks are difficult to measure, with few reliable methodologies available, which means disclosure requirements cannot run too far ahead of the capacity to measure these risks in a meaningful way.

Mr Menon also acknowledged the risk of being too "dogmatic" over absolute standards on carbon emissions. "Our focus will be on how we can become greener over time, rather than aim for an absolute standard of green at the outset," he said.

Singapore will look as well at other incentives to boost interest in green investments.

"Green bonds are really a no-brainer," said Mr Menon.

"But we need to think much further about how we can come up with innovative solutions that make it easier for businesses to invest in greener technologies."

As it is, MAS has rolled out a sustainable bond grant scheme - valid till May 31, 2023 - that subsidises the issuance of green, social and sustainability bonds in Singapore.

In the MAS 2019 corporate debt market development report released in October, it said Singapore's green bond market is valued at more than S$6 billion today, reflecting a good mix of both local and foreign issuers.

And according to AsianBondsOnline, as reported by The Business Times, the size of the local currency bond market surpassed S$420 billion in the first half of 2019, meaning green bonds currently make up just over 1 per cent of the market, a clear sign of potential growth for green bonds here.

The disclosure requirements and incentives are likely to be announced at the upcoming SFF x SWITCH event (Singapore Fintech Festival x Singapore Week of Innovation and Technology), which runs from Nov 11 to Nov 15.