The urgent business of going green

INTEREST in sustainability has been climbing rapidly among investors and businesses in recent years as the climate emergency reaches a dangerous tipping point. The Intergovernmental Panel on Climate Change (IPCC) recently issued its most dire warning to date on the climate crisis, declaring that some of the changes brought about by climate change could be "irreversible" for centuries to come.

The World Economic Forum Global Risks Report 2020 also highlights climate change as one of six significant global systemic risks faced by the world today. This is linked to the ability of governments and businesses to tackle climate change, protect populations and adapt accordingly.

Concerns over climate change has helped fuel the growth of the sustainable finance market, as businesses embrace financial instruments - from green bonds to sustainability-linked loans - that are designed to ensure a better environmental outcome. Globally, the green bond market could be worth two trillion euros by 2023, according to NN Investment Partners.

Governments around the world have also been taking action to support the growth of green finance. For instance, the Monetary Authority of Singapore (MAS) recently committed US$1.8 billion of its reserves to climate-related investments. These funds will be placed with five asset managers to manage new equity and fixed income mandates focused on climate change and the environment.

MAS also recently launched Project Greenprint, a technology platform aimed at promoting a green financial ecosystem by mobilising capital, monitoring commitment and measuring impact.

Embracing green finance

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Experts believe that it is a matter of time before sustainable finance becomes mainstream finance, encompassing the full spectrum of banking and financial products.

"Banking products and services can integrate sustainability elements into their current structure, ranging from sustainable deposits, to green loans, sustainability bonds, trade financing and derivatives," said Yulanda Chung, Head of Sustainability, Institutional Banking Group, DBS.

This trend presents opportunities for businesses as they incorporate more environmental, social, and governance (ESG) factors into their operations. For one, green finance can act as a gateway for firms to expand their access to pools of investors and financiers who are aligned with their sustainability strategies.

Companies that are able to demonstrate their ESG credentials can also potentially lower their cost of capital. "Companies which have superior management of their ESG issues will be considered more favourably by banks and investors. In addition to credit ratings, banks are also incorporating ESG considerations into their financing decision-making processes," explained Esther An, Chief Sustainability Officer, City Developments Limited (CDL).

Over the last four years, CDL has secured more than S$3 billion worth of sustainable finance since its first green bond issue in April 2017, the first ever by a listed Singapore real estate company. These have also come in the form of bonds, loans, revolving credit facilities and a landmark S$250 million sustainability-linked SDG Innovation Loan from DBS in 2019. SDGs refer to the Sustainable Development Goals set by the United Nations.

Sustainability-linked loans allow borrowers to earn a discount on their interest margins if they meet pre-determined environmental or social targets. Banks set these targets with borrowers, providing an incentive for them to improve their performance.

Earlier this year, CDL announced that it had met the performance targets pegged to the SDG Innovation Loan, becoming the first Singapore entity to achieve a discount on a sustainability-linked loan through the adoption of an innovative project that supports the SDGs on a large-scale basis.

However, the benefits of adopting green finance go beyond just dollars and cents. The process of issuing a green bond, for instance, affords borrowers a platform to better communicate their ESG strategy to the investment and financial communities, as well as rating agencies and customers.

To access the green finance market, experts say that companies should be eloquent in identifying what their material impacts are pertinent to their industry sectors, and in earmarking assets which can be labelled "green".

As best practice, the process of securing green financing should align with the globally-established Green Bond Principles and Green Loan Principles. Both of these standards seek to ensure that capital is allocated to genuine green projects.

Forging common standards

Companies also face the challenge of meeting rising expectations by lenders, investors and regulators for enhanced sustainability-related disclosure. The Singapore Exchange, for instance, introduced sustainability reporting requirements in 2016 that aim to highlight a firm's ESG performance.

However, efforts to enhance the quality of ESG reporting have been hampered by the lack of common sustainability standards globally. Such standards can contribute to higher levels of transparency, comparability and reliability, experts say.

Currently, there exists a slew of reporting frameworks and methodologies for sustainability reporting, complicating inter-company comparisons in this area. With the convergence of standards, users of these reports would be able to assess them in a more efficient, effective and consistent manner.

"While it is a challenge to design a 'one-size-fits-all' reporting standard that is applicable to corporations from diverse geographic locations, industries, market caps, business focus, ESG risks and cultures, it is highly possible to customise a 'harmonised framework' - one that is adapted to suit corporates' material ESG issues and aligns with major stakeholders' expectations," said Ms An.

"It is also imperative that regulators and exchanges play a key role in accelerating the transition to a global standard for sustainability reporting by listed companies, given the steep increase in companies adopting sustainability reporting over the years."

Despite the challenges, common sustainability standards have started to emerge in recent years, coalescing around the urgent challenge of climate change.

"At the moment, existing sustainability standards do go through a robust process of standard setting, and these standards reflect expectations of different stakeholders, although navigating through the myriad of standards and frameworks can be complex. While there seems to be key standards emerging, it would appear that a common theme is climate change, and quite rightly so, given the urgency to decarbonise," said Fang Eu-Lin, Sustainability and Climate Change Leader, PwC Singapore.

All hands on deck

Dealing with a challenge as daunting as climate change will require all key stakeholders - from the board and senior management to investors, regulators and individuals - to play their part.

"The problem is simply too large to leave it to the hands of a few. It needs to be all hands on deck," said Ms Fang. "Regulators can play a key role in setting the necessary OB markers in place, while boards and senior management can play a crucial role in ensuring that ESG features as part of business strategy and risk management. Investors can also make smart choices, which in turn have a part to play in holding companies accountable to ESG principles."

Meanwhile, socially-conscious consumers can vote with their wallets, encouraging businesses to reappraise their products and purpose. Ms Fang noted that the global pandemic has created significant additional momentum for change and new norms to emerge.

Yet, the shift towards sustainability will not happen overnight. As Herry Cho, Head Sustainability and Sustainable Finance, Singapore Exchange, puts it: "Sustainability is a journey, not a destination". She urged organisations that have not embarked on this important journey to take their first steps.

"The end destination is continuously going to evolve and change as technology and policies change over time as well, backed by science. So if you think about it as a journey, there is no wrong place to be starting on that journey. The most important thing is to make a start. And sometimes the lever to make a start is going to be regulation," said Ms Cho.

"What's important is for every single management member, and in particular for CFOs, to understand what is the role that the financial team has to play in that overall overarching journey and that overarching view."

The green bond boom

• Between 2006 to 2020, sustainable debt volumes comprising green bonds, social bonds and sustainability bonds (GSS) reached US$1.7 trillion.
• In 2020, about US$700 billion worth of GSS instruments was issued, doubling 2019's volume.
• Collectively, the energy and buildings sectors account for about 60% of 2020's total use of proceeds.