Transforming climate risks into opportunities

THE recent Singapore National Day Rally (NDR) will be remembered for its sobering call to act on climate change - a "life and death" matter according to Prime Minister Lee Hsien Loong. This means that beyond being an environmental challenge, climate change is a threat to our national security.

The importance given to fighting climate change was further signalled by PM Lee's observation that potential mitigation measures will cost about S$100 billion or more over 100 years. In the immediate term, Singapore will allocate S$400 million to upgrade and maintain its drains over the next two years while another S$10 million will go towards studying sea-level rise.

Singapore - and the world - has no time to lose. It was just last year that the Intergovernmental Panel on Climate Change (IPCC) found that carbon emissions would have to be reduced by about 45 per cent from 2010 levels by 2030, so as to keep the rise in global temperatures below 1.5 deg C this century. Limiting global warming to 1.5 deg C could drastically lower the likelihood of extreme drought and risks associated with water availability in some regions for instance, as compared to a 2 deg C global warming scenario.

While governments continue to set the tone, it will be capital flows - especially from private sources - that will increasingly influence the adoption and success of climate mitigation measures. Unfortunately, there is no time for missed opportunities.

RETHINKING CAPITAL FLOWS

Efforts to address climate mitigation through green finance are gaining momentum especially in the West and in major Asian countries such as China. Green finance involves channelling capital towards sustainable industries, companies and activities. At the same time, there are increasing expectations for financial institutions to divert capital away from carbon-intensive, polluting projects.

Just a few months ago, Singapore's DBS Bank, OCBC Bank and United Overseas Bank announced that they will stop financing new coal-fired power plants. Yet, they remain the minority in this region. According to an August WWF report, 91 per cent of Asean banks still finance new coal-fired power plants.

This is worrying for three reasons.

First, the low-carbon transition could involve shifts in market and regulatory environment, heightening the risk of stranded assets for financial institutions. As a result, these assets are unable to deliver financial returns. For instance, the Institute for Energy Economics and Financial Analysis (IEEFA) reported that BlackRock, the world's largest asset manager, has lost approximately US$90 billion over the last decade due to its fossil fuel investments - a view which BlackRock disputes.

Second, the lack of a unanimous position on coal financing in this region could pave the way for "leakage" to happen. This means that coal companies will continue to seek financiers with less stringent environmental and social policies, and not pressure their clients to improve their sustainability practices.

Third, financial institutions involved in coal financing are missing out on the growing business opportunities associated with a green economy. A DBS-UN Environment Inquiry report in 2017 found that approximately US$3 trillion of Asean green investment is needed from 2016 to 2030.

The report further highlighted that future public green finance contributions are expected to decline from 75 per cent to 40 per cent of total green finance, while private financing will likely rise from 25 per cent to 60 per cent. Therefore, financial institutions which are slow to capture these opportunities, could be compromising on their competitiveness.

HOW FINANCIAL INSTITUTIONS CAN PLAY A BIGGER ROLE

Singapore's future is closely intertwined with the region and the effects of climate change can affect the country disproportionately.

Yet, as a leading financial hub in this region, Singapore and its financial institutions are well-positioned to align their financing activities more closely to broader climate goals and thereby support the low-carbon transition in the region.

In fact, the DBS-UN Environment Inquiry report has identified a wide range of green investment opportunities in Asean, the largest of which is infrastructure (US$1,800 billion). The Asian Development Bank also estimated that developing Asia's climate-adjusted investment needs between 2016 and 2030 are largest in the power sector (US$14.7 trillion) followed by transport (US$8.4 trillion).

A few key steps could help to accelerate capital flows towards infrastructure and ensure minimal environmental and social impacts associated with the project lifecycle.

First, governments could start to mandate carbon disclosure among project developers. An estimated 70 per cent of global greenhouse gas emissions are attributed to infrastructure construction and operations including power plants, buildings and transport.

By requiring companies to disclose the carbon emissions of their infrastructure projects, this could help financial institutions make more informed decisions in their assessment and support their ongoing engagement with their clients.

Second, more clarity is needed around what constitutes minimum criteria for sustainable infrastructure. Beyond greenhouse gas emissions, infrastructure projects could entail various risks such as biodiversity, workers' health and safety as well as compensation and restoration of affected communities' livelihoods.

While international sustainability standards, frameworks and principles exist, Asean financial institutions have further developed their own policies and guidelines which closely reflect national laws and regulations. The Singapore Institute of International Affairs is undertaking a study to map these various initiatives and identify best practices regarding the Asean environmental and social factors to consider, when financing the power and transport sectors.

Third, as the region moves towards a common understanding of what sustainable infrastructure looks like, Asian investors can encourage their issuers to issue more green bonds.

As an additional source of financing besides project finance, green bonds' proceeds are to be exclusively channelled to eligible green projects. Clearly, Singapore has potential to do more - its green bond market in Asean stands at US$1.76 billion, contributing 35 per cent of total Asean issuance and is second to Indonesia.

With climate change a hot topic for Singapore and the region, there is no time for missed opportunities. Governments, and increasingly financial institutions, need to rethink how capital is deployed to meet growing needs such as sustainable infrastructure and thereby accelerate the region's low-carbon transition.