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More needed to scale up sustainability in businesses
SUSTAINABILITY has firmly been in the global spotlight for some time. Close to 200 countries have signed the landmark 2015 Paris Agreement which commits to a long-term goal of ensuring the rise in global average temperatures is less than 2 deg C above pre-industrial levels, and the regulatory support for the Paris pact has been forthcoming in an increasing number of countries.
Earlier in October, the Intergovernmental Panel on Climate Change (IPCC) published a special report on the imperative to keep rising global temperatures under 1.5 deg C, issuing a stark warning on the risks of going above this temperature, and what can be done to keep on target.
The IPCC noted that with an increase of 1.5 deg C, water stress, food scarcity, sea-level change, heat-related catastrophe and a broader impact on nature on the environment could be largely diminished; but at 2 deg C this becomes largely impossible. The effect this will have on people and business is clearly significant, though this is yet to be sufficiently quantified and assessed in business.
Reports like the IPCC's make the impact of climate change all the more real. Today, some parts of business are clearly seeing sustainability as a critical step for their future and legacy; to many, keeping sustainability at the core of their strategy is the way to future-proof themselves. A sustainable strategy is no longer a "nice to have", it's a necessity and competitive advantage.
There is already evidence that firms with a conscious approach to environment, social and governance (ESG) issues can deliver above-market returns and provide downside protection to portfolios.
This all paints a very rosy (or should I say, green) picture. However, the reality is that sustainability is still far from mainstream. Increasing attention and a combined effort from governments, corporates, financial institutions and society more broadly is now needed to help drive a more sustainable agenda and future.
MAINSTREAMING SUSTAINABLE FINANCE
A crucial element is that there must be sufficient support for corporates which are promoting the sustainability agenda. For example, Singapore is the first country in Asia to grant a green bond subsidy (launched by the Monetary Authority of Singapore in June 2017) which will cover some costs associated with external reviews of green bonds.
We are also starting to see green loans emerge in the region, following the issuance of clearer guidelines - the Green Loan Principles - from organisations such as the Asia Pacific Loan Market Association in March 2018. Singapore businesses have capitalised on these guidelines, and in the past few months, we have seen the issuance of Singapore's first two green loans in the real estate sector, from Frasers Property Ltd in September and Ho Bee Land Ltd in August.
Inter-governmental initiatives aimed at improving and developing a sustainable finance market in the region will also help. An example is the Asean Capital Markets Forum's launch of new standards for the issuance of social and sustainability bonds in October. Given the importance of the social element in Asia, there is definitely market potential for such bonds in this part of the world.
Looking more broadly to the rest of Asia, it may also come as a surprise to some that China is one of the leading Asian nations when it comes to helping foster a sustainable financial system.
As early as 2015, the People's Bank of China (PBoC) launched the Chinese Green Financial Bond Guidelines and Catalogue, and the introduction of China's green bond assessment and verification guidelines and incentives have also helped to push the agenda.
Focusing on sustainability is not just about the opportunities for businesses, it is also a risk management exercise. Climate change is a material issue, that when not assessed properly could have negative effects on business in terms of contingent liabilities and other related issues.
It is crucial to show stakeholders that the narrative around sustainability is material to them and their companies - not only the future of their businesses in terms of raising funds, but future profitability as well in the mid- to long-term.
For those who want to transition towards being more sustainable, what is a good starting point? In terms of financing, one possible option is to consider a sustainability improvement-linked loan. If the company meets pre-determined ambitious improvement targets for its sustainability performance (which can be measured by an independent ratings agency on an annual basis or through a bespoke set of goals), the interest rate on its sustainability-improvement loan will go down.
This has already proven popular with corporates as a new way to peg their financing to sustainable measures. Since ING pioneered this loan concept with Philips in February 2017, we have completed more than 20 such deals globally across various industries and regions, including with Wilmar International Limited and Olam International Limited in Singapore.
Financial institutions also have a major role to play in supporting corporates in their sustainable development and routes for sustainable finance. They can do this by simply developing these products and offerings for clients, but importantly in a way that demonstrates to the private market that these are viable solutions.
An example of an innovative green bond was how Sindicatum Renewable Energy Company Pte Ltd, a Singapore-based developer and owner and operator of clean energy projects in Southern and South-East Asia, issued two green bonds this year, the first one denominated in Indian rupee and the second in Philippine peso. The specifically-designed guaranteed structure of these issuances meant they had access to a wider investor base.
Transitioning to a more sustainable world will take time, and companies and their financiers must be forward-looking, and innovative, in their approach. At ING we are developing the Terra approach which we announced a few months ago, where we use science-based scenarios to help us to steer our 500 billion euros (S$775 billion) lending portfolio towards meeting the Paris Agreement's well-below two-degree goal. Through Terra, we will be aiming to support clients that seek to invest in the appropriate means and methods, such as technologies, that will lead to a more sustainable future.
What we also see is that there is a clear symbiotic relationship between innovation and sustainability. Businesses that want to become more sustainable often find that innovation is part of the solution.
Today, taking an approach that places sustainability at the heart of a business strategy is hugely important. But a lot more needs to be done if sustainability is to truly scale globally.
- The writer is Head of Sustainable Finance, Asia Pacific, at ING.