SINGAPORE (Nov 11): As the world faces unprecedented climate change, it has never been more evident that urgent action must to be taken. Monetary Authority of Singapore (MAS) assistant managing director (development and international) Benny Chey is under no illusion as to the cost of failure to do so.
“The consequences of inaction are severe. Singapore, specifically, is vulnerable to rising sea levels and more extreme weather patterns. Climate change is an existential threat for us, and combating climate change is now a national and regional security issue,” he stresses. Studies have shown that by 2050, several cities in the world will experience unprecedented climate shifts, Singapore being one of them.
It is no surprise, then, that green financing has become a crucial element in the conversation about climate change and arresting it before it is too late. In fact, in his National Day Rally 2019 speech, Prime Minister Lee Hsien Loong said $100 billion or more may be needed in the long term to protect Singapore against rising sea levels.
Furthermore, it is estimated that over US$7 trillion ($9.5 trillion) a year is needed to fulfill the United Nation’s Sustainable Development Goals, of which climate is one of the 17 goals.
Green financing is loosely defined by the United Nations as actions or activities taken to increase the level of financial flows (banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities.
Unfortunately, says Chey, green financing is far from being mainstream, as it faces several hurdles.
“[First,] how do we define what is green and what is not? How do we measure the activities [that] are reported to qualify them as green? And when companies disclose their activities, what is the quality of the disclosure? The overall concern is the lack of consistent data sets and the potential information asymmetry,” he explains.
There are efforts to streamline the definition of green financing. They include the recently released 404-page report by the European Commission that provides guidelines on what qualifies as environmentally friendly investment. Their purpose is to generate more private investments or redirect existing funds, and help reach emissions targets.
Chey says, however, that there has yet to be a globally agreed definition for green financing. In addition, even with the growing body of scientific evidence and the ability to process huge amounts of data on climate change, one cannot underestimate the challenge of understanding what it all means in practice, says Chey.
“Even with the availability of data — with big data and technology today — what are the actionable insights? And how is it taking into account policy interactions? I think this is one of the reasons why finance has not stepped more forcefully into the picture.”
He says another reason is the “principal agent issue”, where there is a separation between the principal and the agent (that is, the person acting on the principal’s behalf). The theory is if you separate the two, the decisions made might not be the same as those made if principal and agent were the same person.
“One of the manifestations of this separation is the acknowledgement of the problem by the agent, but it is not his mandate to resolve it. If the principal and agent are the same, the responsibility will be taken fully by the person,” he explains. “What it means is, for a bond issuer, the mandate is to fund as cheaply and reliably as possible on behalf of a company. For an investor acting on behalf of the asset owner, the focus is on returns, and he may not opt for green assets if it does not generate at least equivalent financial returns.” This then leads to a mismatch in purpose and outcome, where neither party is responsible for the mandate to take on green financing.
He adds that there is also a lack of confidence in investing in sustainable activities, owing to a lack of data as well as a perception that there is an “early mover disadvantage”.
Chey says there is a wait-and-see attitude among companies, at least until it is clear to them what the risks are. There are also friction points for issuers getting into the green bond market. Among other things, they have to incur additional and explicit costs, so there is an issue of being penalised, so to speak, for doing good or going green, he adds.
“On the demand side, too, there is some hesitation. Is there evidence that investing in green helps? Is it within my mandate, is the regulator telling me to do something? So in the absence of demand, there may be inertia,” he points out.
MAS has stepped in to address some of the obstacles. “For example, in the areas of supervision and lending practices, MAS has included bank sustainability practices in our supervisory assessment role, [to] strengthen [the banks’] efforts to integrate sustainability into their business models and risk management functions, in addition to discussions about best practices. These are best practices, not regulations, but doing so helps to move the financial institutions into a space where the data and knowledge gaps can be narrowed.”
In fact, adds Chey, The Association of Banks in Singapore in 2015 issued guidelines on responsible financing. The objective was to set minimum standards on responsible financing practices to be integrated into the banks’ business models and risk management functions.
In 2017, MAS issued a Guidance on Own-risk Self Assessment for insurance companies. It provides guidelines for insurance companies to consider environmental risks and incorporate climate variability scenarios when they run stress tests on their portfolios, further closing the knowledge gap. In terms of disclosure, Chey says, despite the Singapore Exchange’s compulsory sustainability disclosures for listed companies, there is still a long way to go.
He says to this end, the upcoming Singapore FinTech Festival is a powerful platform to plug the sustainability agenda into the technology, innovation and finance ecosystem, bringing them together and harnessing their collective capabilities.
“I think this coming together will catalyse innovative solutions and really accelerate [green financing] forward for Singapore and the region,” he adds.
Not only that, MAS is building up industry awareness, capacity and expertise in green financing by working with multiple partners, including the International Finance Corporation and World Wide Fund for Nature.
Chey believes the problem must be tackled holistically. “We incentivise — everyone loves that — but we also signal to everyone in the industry the kinds of activities we do not want or discourage.”
He points out, however, that this top-down approach will ultimately be overtaken by an even more powerful driver of change — the bottom-up demand from a new generation of investors for green activities and assets that will push the reallocation of resources into sustainable activities.
“It’s coming. In terms of the new generation, the demand has been expressed much more in the private market space thus far. The demand for green and sustainable projects, and impact investment is growing. It is only a matter of time that these bottom-up-driven forces drive the choices and decisions financial institutions make.”
