Rules surrounding sustainability reporting may appear cumbersome, but corporates stand to benefit from greater opportunities ahead, says Yeo Lian Sim, vice-chair of the Financial Stability Board (FSB)’s Task Force on Climate-Related Financial Disclosures (TCFD).
By taking sustainability disclosures seriously, companies may avoid risks and reach new investors, Yeo tells The Edge Singapore.
Speaking at the inaugural edition of the MUST Go Green event organised by Manulife US REIT, Yeo shared her experience as one of four vice-chairs on the TCFD. “We were there to help in case there were disagreements. But I must tell you, I feel a little underused because there never were [any]. We just discussed everything until we came to a joint conclusion. So, that should give you some confidence in what came out in the recommendations,” she adds.
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Finalised in 2017, TCFD’s recommendations have become the global framework for understanding and communicating climate-related financial risks and opportunities. After four years of living and working with these recommendations, governments are recognising that this is a useful framework, says Yeo.
She hopes that businesses, too, can appreciate the TCFD’s work. “The framework is for us to understand climate change and its effects on a company, [as well as] the company’s effects on climate change.”
Recommendations are sorted into four areas: governance, strategy, risk management and metrics and targets. “These are very familiar terms and concepts; this is business speak. It’s because this framework is designed for businesses specifically,” says Yeo.
Yeo is also special advisor for diversity at the Singapore Exchange (SGX), where she formerly served as chief risk and regulatory officer.
In her speech at the Oct 5 event, Herry Cho, managing director and head of sustainability and sustainable finance at SGX, further highlighted the threat of climate emergency, from acute risks like flash floods to chronic risks like greater rainfall and rising sea levels.
Cho: If we don’t take further action today, the chance of physical risk further down the road is going to be higher
"If we don’t take further action today, the chance of physical risk further down the road is going to be higher. But if we do take drastic action today, there’s going to be a higher transition risk, but the physical risk at the end of the road is going to be lower,” says Cho.
So, is this a no-win situation? “Actually, this is an all-win equation because transition risk is something that is more within our control,” adds Cho.
Singapore, as a financial and business hub, should incorporate a thorough understanding of what TCFD is about and apply it in business, says Yeo. “Already, investors are demanding ESG [environmental, social and governance] information for investment decision-making. Looking further ahead, it should position Singapore to better contribute to financing responses to climate change and intermediating the large flows of capital that will be a force in financial markets for years to come.”
Singapore’s green pace
As the world’s largest emitter of greenhouse gases, China has received much scrutiny for its goal to achieve net zero emissions by 2060. It joins just four other countries that have net zero pledges set for after 2050, including Australia and Singapore.
Under the Paris Agreement, Singapore aims to peak its emissions at 65 million tonnes by around 2030 and halve that amount by 2050. The republic will strive for net-zero emissions “as soon as viable” in the second half of the century, said Coordinating Minister for National Security Teo Chee Hean in February 2020.
Opportunities may abound, but is Singapore keeping abreast of the world’s green pace? “The government may not have made a commitment to a year for net zero, but it has the Green Plan 2030, which is very comprehensive and touches many aspects of life,” says Yeo.
On Aug 26, SGX proposed to make climate-related disclosures mandatory for companies in their sustainability reports from Jan 1, 2023, starting with key sectors like agriculture, food and forest products, energy, materials and buildings, transportation and finance.
This makes it the first exchange in Asia to propose mandating climate disclosures in accordance with the TCFD.
“If that’s the way the market is going, that’s the way you’re going. I think we all accept that. If I may be permitted to make a little comment on why we made it compulsory: If it’s good, do it,” says Yeo.
Yeo also highlighted Singapore’s “very small carbon tax”, fixed at $5 per tonne of carbon dioxide equivalent until 2023.
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In comparison, Sweden’s carbon tax, which was introduced in 1991, has gradually increased to SEK1,200 ($185.57) today.
She drew a reference to Singapore’s goods and services tax (GST), introduced in 1994 by then-Finance Minister Richard Hu. Economists view such a taxation structure, which is levied on essentials like utilities and not just discretionary spending, as regressive.
However, the government pushed ahead with using GST to add to public coffers, as it saw the need to diversify sources of public revenue amid structural, long-term growth in spending. “I refer you to the introduction of GST at 3% — probably by the only finance minister in the world to introduce a GST and keep his job and his popularity — when it wasn’t needed,” says Yeo.
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“But the infrastructure was there to be used when needed. So, I think the fact that we have a carbon tax is meaningful; I think making preparations and being there is very important,” she adds.
Deputy Prime Minister Heng Swee Keat and Finance Minister Lawrence Wong have both commented that Singapore will revise its carbon tax rate at next year’s Budget.
Buildings, not cows
Some 40% of global emissions come from buildings, says Jill Smith, CEO of MUST. “Not cows, agriculture or transport, but buildings. So, REITs have a duty and an imperative to up their ESG game.”
ESG-focused REITs have a competitive edge, adds Smith. “They tend to attract quality tenants, maintain high occupancy and have lower operating costs from utilities and taxes. They have increased accessibility to cheaper capital, they attract talent and avoid brand erosion. The penalty for not integrating ESG is that tenants will shy away from properties and values will drop, leading to stranded assets.”
Smith: In the US, many listed companies and government agencies will only lease green buildings
Currently, eight of MUST’s nine office properties have green certifications like LEED (Leadership in Energy and Environmental Design) and Energy Star. “We are way ahead of many with office buildings in the US, because in the US major cities only 13.8% [of buildings] are deemed to be green. We are at 90%,” says Smith.
Smith tells The Edge Singapore that the pandemic has made tenants seek out “green and healthy buildings”.
“We have even received requests from top tenants to discuss the ESG performance of our buildings to ensure they meet their own sustainability criteria.”
As at end-2020, net inflows into sustainable funds globally increased 109% y-o-y to some US$350 billion ($474 billion), notes Smith. “Since MUST’s IPO in 2016, the number of ESG funds invested in our S-REIT has increased from three to over 20."
“In the US, many listed companies and government agencies will only lease green buildings. A growing number of states and local regulators are incentivising energy efficient buildings and penalising high carbon emitters,” says Smith. “The cost of not complying with ESG is increasing.”
Photos: Manulife US REIT
