Singapore ESG financing: dirty hands make green work?

The city state wants to be at the forefront of green financing in Asia. But could it do more to help the region catch up with Europe?

Singapore ESG financing: dirty hands make green work?
Ever since the 2015 publication of the Paris Climate Agreement and UN’s Sustainable Development Goals, global regulators and development finance institutions have been evaluating how to promote and develop green finance.
 
It is one of the most promising and important sectors of the capital markets. And it is a particularly important one for Asia given the region’s higher economic growth rates compared to Europe where green finance is far more embedded.
 
Yet FinanceAsia is not the first to point out that Asean has been a notable laggard in going green.  As Jane Xu, climate anchor for East Asia and the Pacific at the International Finance Corp (IFC) remarks, “it hasn’t been very active to date”.
 
One of the IFC’s main tasks is to change that and its partner of choice has been the Monetary Authority of Singapore (MAS).
 
“The Singapore government really wants to take the initiative to support green finance through technical assistance and financial incentives,” Xu said.
 
As such, the two signed an MOU last June and held their first joint workshop for asset managers, regulators and potential issuers in October. Xu is hopeful that this will generate two new SGX-listed green bond issues from the IFC’s corporate and financial sector clients during 2019. 
 
She explained: “Aside from cost considerations, there’s a cultural issue to contend with. Many potential issuers and asset managers are nervous about jumping into green bonds without fully understanding the qualification of green assets and the relevant monitoring and reporting requirements.”
 
So the first step is really about education and explaining what green assets are and how to classify them,” she added.
 
This is especially important for financial issuers, which will play a critical role in scaling up the region’s green efforts by leveraging their client networks. For example, the MAS calculates that Asean will need about $200 billion in annual green investment through to 2030 and believes that private finance will bankroll roughly half of it. 
 
The IFC has consequently been targeting much of its financial firepower at green bonds issued by the region’s banking sector. Since December 2017, it has structured and invested in a string of debut private placed transactions from the likes of the Philippines’ BDO Unibank and China Bank, as well as Indonesia’s OCBC NISP and Thai Military Bank.
 
During 2018, it also invested $256 million in the world’s largest green bond fund: the $1.42 billion Amundi Planet Emerging Green One Fund. However, the fund has yet to allocate any of its money to Asia because of a lack of new green bond issues in which it can invest. 
 
Xu is confident this will change in 2019.
 
CHICKEN OR EGG?
 
But this cuts to the heart of the main dilemma. Regulators want to speed up market development, but should they push issuers or investors first and hardest? And what should they use: a carrot or a stick?
 
Free trade jurisdictions with open financial markets tend to prefer carrots in case a prescriptive approach drives business away. Singapore has also very consciously targeted issuers even though it is the region’s premier asset management hub.
 
The MAS’s Green Bond Grant Scheme is a classic example of this approach in action. Its S$100,000 ($73,119) subsidy covers the upfront costs to obtain the external certification that issuers need to demonstrate that bond proceeds will fund green projects. 
 
The MAS calculates that issuers have raised S$2 billion since the scheme was launched in June 2017. They include DBS, the first financial institution to take advantage of the scheme, and Manulife, the first insurer.
 
The Singapore Exchange (SGX) also introduced a ‘comply or explain’ regime in 2016. This means that Singapore-listed companies must publish an annual sustainability report within five months of their financial year-end.
 
On the positive side, a recent report by the Asean CSR Network and National University of Singapore Business School noted that the percentage of reporting companies has increased from 52.1% in 2016 to 55.3% in 2018. 
 
But it also highlighted that the remuneration of board directors and senior executives is only linked to sustainability practices in 31 out of 678 main board or Catalist-listed companies. 
 
On a regional level, Asean also launched its Green Bond Standards in 2017, followed by its Social Bond Standards and Sustainability Bond Standards in 2018. And it has gone for full-blown standards compared to the principles adopted by the International Capital Markets Association (ICMA).
 
One Asean regulator said that the group did this deliberately to send a strong signal about just how important it feels green financing is. “We also elaborated more deeply and excluded fossil fuel projects because we wanted to be strict from the start,” the regulator added.
 
Yet if a regulator like the MAS wanted to be truly radical, it could follow the European Union, which is debating whether to deploy a stick and become a lot more prescriptive in its approach.
 
As Samuel Chan, head of capital markets, Singapore at Standard Chartered said: “The EU is examining whether to incorporate sustainability into the prudential requirements for banks, insurance companies and pension funds. 
 
“It’s a good way to institutionalise countries’ commitments to the Paris Agreement,” he stated. “But it runs up against Singapore’s free market ethos. 
 
“So that’s why the MAS has never come out and said that asset managers have to hold x percentage of their funds in green assets,” he concluded.
 
Consequently, while Singapore may be the region’s pre-eminent asset management centre, it has no dedicated green unit trusts. 
 
The IFC’s Xu hopes this will change too. “I definitely think that more push on the investor side would help,” she commented.
 
“Most Asian funds don’t have clearly defined green mandates yet,” she elaborated. “And that doesn’t help me to convince issuers who’re always asking what the benefits of a green bond are beyond doing good. 
 
“I’d like to tell them it will enable them to tap a different investor base and one that’s more likely to hold their bonds until maturity,” she continued. “In Europe, that’s certainly the case.”
 
This argument is backed up by Adam McCabe, head of Asian fixed income at Aberdeen Standard Investments in Singapore. But he thinks 2019 could be a tipping point.
 
“A lot of asset owners are talking or actively engaging managers with a view to ramping up their green investments,” he said. “This crowding-in effect of investors will encourage more companies to tap the market too.”
 
And the potential is undeniable, particularly where green buildings are concerned. Xu believes this is one area where Asia could really make its mark.
 
The IFC estimates that Indonesia has $209 billion potential through to 2030, followed by Thailand on $125 billion, Vietnam on $80 billion and the Philippines with $57 billion.
 
“This is Asia’s low-hanging fruit,” she concluded. “The benefits of green buildings are very easy to quantify for issuers, investors and end-consumers.”
 
She also highlights the IFC’s green building certification tool called EDGE (Excellency in Design for Greater Efficiency), which provides clear and achievable targets.
 
Other Asian debt capital markets bankers agree. Sean McNelis, HSBC’s co-head of Asia Pacific debt capital markets, flags a growing green pipeline. 
 
“There’s a structural change happening in Asia,” he said. “This part of the world is being led by green corporates and banks, whereas in Europe about half of all issuance has come from SSA (sovereign, supranational and agency) borrowers.” 
 
Conan Tam, co-head of Asia Pacific debt solutions at Bank of America Merrill Lynch, agrees. “Once a corporate turns green, it never turns back,” he concluded.
 
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