Green finance in Asia: Emerging themes and the need for innovation

AS global action towards achieving carbon neutrality gains momentum, Singapore has taken on the mantle to become the regional green finance hub. With the Monetary Authority of Singapore (MAS) leading the charge through the Green Finance Action Plan, many private players have also jumped on the sustainability bandwagon with recent announcements such as the launch of a Singapore-based global carbon exchange, Climate Impact X (CIX) by SGX, DBS Bank, Standard Chartered Bank and Temasek.

Despite these recent strides in the right direction, the Asean region still faces a significant green financing gap. A report by DBS and UN Environment on Green Finance Opportunities in Asean estimated that US$200 billion of green investment is needed annually from 2016 to 2030 in Asean to sustain progress.

An industry survey conducted by MAS and Oliver Wyman to collect problem statements for the Global Fintech Hackcelerator 2021 revealed key industry themes and challenges that we have distilled into three key observations.

In recent years there has been growing interest from institutional and retail investors to support and fund green finance initiatives. However, directing capital towards these initiatives remains a mammoth task. Besides the limited market for sustainability-linked financial instruments, investors and lenders also lack reliable, consistent and easily accessible data to make well-informed decisions on projects they wish to finance.

To encourage active participation in the green financing space, industry leaders are looking to empower institutional and retail investors with reliable and customisable tools to facilitate decision-making in allocating capital to green projects. Creating a viable marketplace that allows easy access to green investments, plus making sustainability-linked financial instruments attractive, are key to incentivising green capital flows.

On the flipside, carbon footprint data is also tedious to collect, complex to compute and difficult to verify. This is attributed to a multitude of factors, including inconsistency in methodologies adopted and lack of aggregation of data. Without meaningful data, decision-makers cannot effectively track companies' environmental impact and monitor their progress towards achieving sustainability goals. To address this, more corporates are looking towards the application of advanced technologies, like blockchain and Internet of Things (IoT) sensors, to track and authenticate carbon footprint data, without incurring significant costs.

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The ability to collect real-time data on carbon emissions will prove to be a game changer as companies will be able to set their own targets and follow up on their progress. To complement this, having a centralised source of authenticated environmental data on suppliers and small-to-medium enterprises (SMEs) will allow easy tracking of carbon footprint across supply chains. This will give investors and lenders a better view of companies' commitment towards sustainability goals.

GLOBAL COLLABORATION VITAL

A broadly accepted impact measurement framework for green investments and loans does not yet exist, despite multiple public and private entities developing their own proprietary ones. This is concerning to asset owners who are seeking to allocate capital with the intention of generating positive impact. Without a single industry standard, asset owners have little basis to compare the performance of different investments and confidently evaluate whether their investments are meeting their expectations on outcomes.

Improving efficacy of impact measurement in green projects will require the development of a standardised framework and related tools across different industries and geographies. Global collaboration between regulators and international bodies is key to paving the way towards establishing a widely accepted framework in the near future.

These emerging challenges in green finance call for innovative solutions. Fintechs around the world have already started solving some of the prominent issues through the use of advanced technologies. One area which has seen increasing innovation is the development of platforms for financing green projects and initiatives. Fintechs offering such services seek to bridge the financing gap by effectively matching supply and demand of green capital, with technologies such as blockchain adding credibility to information shared and data analytics providing rich insights. A few fintechs go a step further in mitigating risk by using securitisation as a tool to make investments more feasible.

Collection and validation of sustainability data is another domain which has seen innovation of late. Some green fintechs are offering real time carbon footprint monitoring through APIs (application programming interface) which connect directly to asset owners' environmental data sources. Such data can power up informative dashboards and be used to generate investor-grade reports on demand. Other applications enable corporates to gain much better visibility on environmental impact and carbon footprint of their supply chain while also being able to choose suppliers and SMEs with lower carbon footprints.

Notable efforts have also been observed in leveraging artificial intelligence (AI) to standardise sustainability reporting. Green Fintechs have developed solutions to process and analyse large amounts of unstructured data so that they can be presented in a standardised format. Investors and lenders will benefit greatly from the ability to benchmark companies, especially on a universally accepted scale.

Solutions like these are now being developed on a market-ready scale by fintechs, providing a glimpse of the great potential that technology holds in solving these emerging challenges in green finance. How soon this potential can be realised rests much on the effectiveness of industry leaders and fintechs to come together and collectively work on these issues.

• The writers are from Oliver Wyman. Ben Balzer is partner and head of private capital, Asia-Pacific; Anubhav Kumar is engagement manager.