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Investing for a greener future

Singapore is poised to be at the forefront of green finance.

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A carbon tax on industrial facilities with emissions beyond a threshold level was introduced last year.

IF LEFT unchecked, climate change could shave an estimated 11 per cent off South-east Asia's gross domestic product by the end of the century. The region in particular is in its direct firing line. Nowhere is the environmental threat more alarming than in the region, where low-lying coastal zones are highly vulnerable to coastal erosion and flooding amid rising sea levels.

This dismal backdrop has a direct impact on financial risks for the business community. In an October report, Citi GPS pointed out that financial risks associated with climate change include having stranded assets. The risks can manifest in two ways, the report noted.

Firstly, there is the risk of a sharp decline in the value of real assets due to a material change in the demand for the asset. These declines can be driven by changes in legislation, regulation, taxation, technology, tastes, input prices and market structure.

Reports suggest that meeting the Paris Agreement's 2-deg Celsius objective could mean that more than 80 per cent of all proven fossil fuel reserves become stranded resources.

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"Prompt corrective action means decisive steps now towards a low-carbon economy. This would mean some combination of carbon emissions taxation, cap and trade schemes with emissions trading systems, and regulation to limit carbon emissions," the Citi report said.

"Governments can encourage and/or fund directly research and development of innovative techniques that help close the emissions gap. But, this will inevitably involve some writedowns of assets that currently have a positive value."

For example, over in Singapore, a carbon tax on industrial facilities with emissions beyond a threshold level was introduced last year, as part of efforts to reduce the nation's carbon emissions by 36 per cent from 2005 levels by 2030.

The second form of risk comes with the direct and physical destruction of an asset due to climate change. Natural disasters can hurt assets such as infrastructure projects, properties, land and water resources. The physical risks to humans also have financial dimensions, such as the exposure of providers of life insurance and medical insurance.

"Both sets of risk have the potential to be huge. However, there remains significant uncertainty regarding: firstly, the precise manner in which these risks may materialise; secondly, the likely transition or adaptation outcomes; and thirdly, the valuation of the possible losses - and, for some assets, gains - that could be involved," the Citi report said.

To be clear, another glaring issue is that many low-carbon investments in key emitting sectors are not yet profitable. In contrast to the growing cost-competitiveness of renewable energy generation and electric vehicles, fewer viable alternatives exist in many sectors with a significant share of global emissions.

These sectors include heavy industry - which contributes to 18 per cent of emissions - as well as the agriculture, forestry, and land use industry, which contributes 24 per cent of emissions, a report by the Climate Finance Leadership Initiative said.

"In some cases, solutions for decarbonising these sectors are technically viable but not yet economical due to high capital costs and lack of incentives or revenue models. In other cases, the necessary technologies require further development to reach commercialisation."

Rise of green bonds

Many corporates, nationals and supranationals are responding tightly towards climate change by leveraging green bonds because of its positive social and financial impact to the society and corporates.

Proceeds from green bonds should be used to fund projects with clear environmental benefits, with the following broad categories provided by the guidelines: renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation and clean water and/or drinking water.

Green bonds have since emerged from being a niche market into an investable asset class. The issuance of explicitly "green" or "sustainable" debt has grown from around US$1 billion in 2009 to more than US$260 billion in 2018, the report by the Climate Finance Leadership Initiative showed. China's green bond market has ballooned in just three years to become the world's second-largest, just 2 percentage points behind the US, a UBS report in September showed.

The rising use of blockchain technology can also mean cost savings in the green-bond market, said a report co-produced by the HSBC Centre of Sustainable Finance and the Sustainable Digital Finance Alliance. "Blockchain can step into the bond market to take over the role of trust broker, making it easy to reduce the overall costs of bond issuance and impact the minimum coupon size," the report said.

To add, blockchain is not developing in isolation, but is converging with both the Internet of Things and artificial intelligence (AI). This could make the bond market far more efficient and accurate in the future, the report said.

"Data from the real economy can be uploaded directly to the distributed ledger from sensors in a green asset and exposed to investors in real-time, demonstrating proof of impact. AI can interpret messy or difficult-to-interpret data before it arrives in the digital wallet of the investor."

The Monetary Authority of Singapore (MAS) and IFC, a member of the World Bank Group, teamed up last year to encourage green bond issuances by raising awareness and knowledge of finance professionals on green finance issue. As the region's rising financial hub, Singapore is poised to catalyse the funding of green financing in the region and be at the forefront of this growing asset class.