Is your financing really green?

In the Singapore Green Plan 2030, sustainability is earmarked as an engine for jobs and growth. Among the targets are to make Jurong Island a sustainable energy and chemicals park; to position Singapore as a leading centre for green finance and services to facilitate Asia’s transition to a low-carbon and sustainable future; to make Singapore a carbon services hub in Asia and the leading regional centre for new sustainability solutions; and, of course, to make the city-state an increasingly a sustainable tourism destination.

These targets are on track despite geopolitical pressures that have taken the global economy and Europe — the West’s leading proponent of “going green” — off-kilter. The current European war, started by Russian President Vladimir Putin, has triggered rising energy and food prices. Both Germany and China — the world’s fourth- and second-largest economies — are set to revert to coal. Indeed, China is already producing more coal.

“What you now have, whether you are Indonesia, you’re in India or elsewhere, you have to face a global food and energy crisis. These are basic rights, people need to eat, they need to have food on their plate, they need to have energy to get from A to B. And that’s going to be quite a pickle,” says Helge Muenkel, group chief sustainability officer (CSO) at DBS Group Holdings.

Europe wants to become energy-independent so it can use oil and gas sanctions to curtail Moscow’s expansionist ambitions. Muenkel, who is German, believes renewables are one way out of this conundrum. The pricing difference between renewables and fossil fuels has narrowed dramatically.

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“The relative economics are actually very much in favour of renewables, but you need to build it right. And it’s also not enough that you build renewable energy facilities, you need to upgrade the grid,” Muenkel points out.

Then there is the intermittency of sun and wind, which means the grid has to be capable of storing energy for use when they are unavailable.

The issues with dependency on Russia, temperatures reaching all-time-highs this summer in Europe, wildfires and droughts are wake-up calls. “Strategically, I think the race to net zero is completely intact. And if anything, [these challenges] will actually accelerate the transition to net zero,” Muenkel says.

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However, pivoting to renewables, building the infrastructure and changing the grid take time, even for advanced economies such as Japan, Australia, the European Union and Singapore.

Banks lead the way

In May 2021, MAS launched several initiatives to accelerate green finance in Singapore through improving disclosures and fostering green solutions. The Green Finance Industry Taskforce (GFIT) issued a detailed implementation guide for climate-related disclosures by financial institutions; a framework to help banks assess eligible green trade finance transactions; and a whitepaper on scaling green finance in the real estate, infrastructure, fund management and transition sectors. The guide on implementing climate-related disclosures is aligned with the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).

The framework for green trade finance and working capital provides a principles-based approach for banks to assess eligible green trade finance transactions, and specific guidance on recommended industry certifications for trade finance activities to qualify as green.

GFIT’s whitepaper includes a green securitisation platform to scale sustainable infrastructure investments in the region and recommendations for the use of transition bonds and loans in the shipping, oil and gas and automotive sectors to support more sustainable practices.

In March this year, the International Financial Reporting Standards (IFRS) announced that the International Sustainability Standards Board (ISSB), set up at COP26, will develop a global baseline for sustainability reporting. IFRS says ISSB reporting builds on TCFD reporting on climate change and applies them to sustainability.

Closer to home, the authorities have acknowledged the problems with sustainability reporting and are implementing plans to align local companies with global reporting standards. In his keynote at “Climate Reporting in Asean — State of Corporate Practices” on July 19, Tan Boon Gin, CEO of Singapore Exchange Regulation (SGX RegCo), said: “When the ISSB standards are issued, we will begin the process of incorporating the ISSB standards into our listing rules as mandatory disclosure requirements for our listed companies. In preparation for this process, we have set up a Sustainability Reporting Advisory Committee together with the Accounting and Corporate Regulatory Authority (ACRA). We have also required issuers to minimally subject the climate reporting process to internal review by their internal audit functions.”

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Climate-related financial risks are likely to lead to increased reputational and conduct risks for banks compared to their sustainability pledges and the Basel Committee is stepping up supervision, reports Fitch Ratings. The Basel Committee principles, issued on June 15, are another step in the growing importance of ESG for bank supervisors.

“We believe banks that fall short of the evolving climate-related requirements will increasingly face adverse reputational, regulatory and — ultimately — financial consequences,” Fitch Ratings says.

The Basel principles cover corporate governance, internal controls, risk assessment and management, and reporting to provide a common baseline for all banks and supervisors in Basel Committee member jurisdictions.

Greenwashing

“The EU authorities are the most advanced in their progress. Discrepancies between what banks say and what they do could lead to reputational damage, as highlighted by recent high-profile greenwashing claims,” Fitch Ratings says.

In May, the SEC charged the fund-management arm of BNY Mellon for mis-statements and omissions about ESG considerations in making investment decisions, which led to a US$1.5 million ($2.09 million) penalty. The SEC is also reportedly investigating Goldman Sachs’ asset management division over ESG claims made by its funds.

“The forthcoming ECB climate stress test will require participating banks to consider the extent of operational risk events, including litigation and fines, within its stress and scenario analysis,” Fitch Ratings says. ”EU regulations already require banks to disclose how they link remuneration to sustainability, and we believe the Basel principles could lead to similar requirements in other jurisdictions,” Fitch Ratings says.

The principles state that a bank should consider whether the incorporation of material climate-related financial risks into its business strategy and risk-management frameworks may warrant changes to its compensation policies.

According to Tan of SGX RegCo, greenwashing can cause misallocation of capital. “This is particularly damaging in a disclosure-based regime where the accuracy of the information on which decisions are based determines how effective the market is in the pricing and allocation of capital,” he says.

Greenwashing also results in an uneven playing field. If left unchecked, greenwashing will allow companies that do not incur the cost of greening to enjoy the climate incentives. It will then be unfair for these companies to compete for the green dollar against others which have incurred greening costs.

“In the long run, the genuinely green companies and products may end up failing because, if the market cannot tell the difference, it may choose the lower-cost greenwashed companies,” Tan warns.

As he sees it, the best way to prevent greenwashing is with reliable information and data.

Low-hanging fruit

The local banks, meanwhile, are clear on how they can best go about balancing the roles they should play. “The best way to think about where the opportunities for sustainability or sustainable finance are, is to look structurally at the sectors of the economy that require the most financing, to move towards sustainable business models or technologies, as well as where different sectors are more ready than others,” explains Eric Lim, group CSO, United Overseas Bank (UOB).

The most transparent green financing with low-hanging fruit is the real estate sector. Real estate developers can bring their buildings to green marks and have them certified green. Green buildings are an advantage to their owners in a couple of ways. First, they attract high-quality tenants who care about sustainability. Secondly, utility costs, which have surged this year, are likely to be lower for green buildings.

For banks financing these buildings, the amount is large, the certification of the building is transparent and everyone can see the building. As examples, CapitaSpring and CapitaGreen have green facades and green technologies for efficient use of energy.

In March 2021, Singapore Land Group accessed some $300 million of loans from UOB and DBS Bank. Of this, $200 million is a sustainability-linked loan to refinance existing facilities. The remaining $100 million is a green loan to upgrade Singapore Land Tower into a green building. Green features include lush landscaped public spaces, energy-efficient lifts and lighting, a low-emissivity double-glazed external curtain wall system, and priority parking for electric/hybrid cars.

“Almost as a trend, where technologies are available, when industry is coherent, where the ticket sizes are large, is where you see the early fruit,” Lim says.

Transition financing and fossil fuel

Should banks continue to finance their oil and gas, offshore and marine, aviation and transportation customers? Banks cannot just abandon these clients, especially with Singapore being an aviation hub, transhipment hub and financing hub including commodity financing. Banks view these sectors as opportunities that can transition these so-called hard-to-abate sectors to sustainable sectors. One solution could be transition financing.

“The areas of big opportunities will be around power generation. Being able to help various economies move away from coal or gas-fired power plants, increasingly towards renewables, whether it’s solar, is very applicable in our part of the world,” Lim observes. “How can we bring the oil and gas industry on a transition pathway towards net zero by 2050?”

These transition technologies in the energy sector are still in development, such as hydrogen and wind power, and many oil majors are getting a windfall from higher oil prices. “It’s very hard for some of these industry players to see decarbonisation of power that does not result in them suffering an existential threat,” Lim acknowledges.

Muenkel indicates that DBS is committed to decarbonising its oil and gas portfolio. “These big guys, the old companies, ultimately, they know what is coming and they have all sorts of different approaches on how to get there.”

The approach by DBS is to “ideate together” with its clients. “Let’s ideate together, let’s see how we can decarbonise your business. And we are very committed to collaborating. You need to move to renewables, you need to invest into new technologies like carbon capture, utilisation and storage (CCUS) technologies,” Muenkel points out.

As he sees it, the oil majors have to be part of the solution. For instance, hydrogen is a technology that has been hyped since the 1970s and it’s a proven technology. It could also be commercially viable once the infrastructure is built. “These [oil majors] can actually help to build the infrastructure but as with any other sector, we need to engage and we need to think of ideas together, collaborate and get the emissions down now. And of course, for them, it’s always a bit sensitive, because their industry ultimately is sunset,” Muenkel continues.

In a recent discussion on commodity financing, Ng Chuey Peng, managing director and head, global commodities finance, OCBC Bank, points out that ESG is a theme that commodity players see as key to their staying power.

According to Ng, commodity traders play a critical role in ensuring the world can function, but they also display agility and versatility. Although the endgame is to make money, they also meet needs and demands and hence react to changes quickly. “We look at the commodity traders not as a slow death but as leading us into this [ESG financing] megatrend. Instead of abandoning them, we find ourselves following them,” she says. OCBC has a $50 billion target for sustainable financing loans by 2025 and looks set to meet this target.

“In our discussion with the commodity traders, they are re-strategising to integrate sustainability targets,” Ng adds. But, they cannot give up on oil completely because companies and governments have to balance lives and livelihoods versus climate change.

Transition financing involves pivoting the trading process to transition fuels, from oil to gas, from liquefied petroleum gas (LPG) to liquefied natural gas (LNG), to renewables and experimental stakes in hydrogen, Ng says. LNG is cleaner than LPG, for instance.

“Metals and minerals are produced from oil and gas but metals are so important to renewables such as solar panels and windmills. What is driving metal prices is renewables,” Ng says. “Without metals and minerals, you cannot achieve your renewable targets. This industry (commodity financing) is looking at how to tap greener energy,” she adds.

According to Lim of UOB, sustainable trade finance (of which commodity finance is the largest part) is a big trend and opportunity. “This is linking up manufacturers, agricultural players, with the right level of certification and assurance. So that as they sell through their value chain or supply chains to say, other countries or developed markets, that sustainability certification can provide that level of assurance to the end buyers.”

Smart-city solutions

Lim believes that an area of opportunity relates to the built environment and the Singapore Smart Nation initiative. “In Singapore, right from the top, there’s an aspiration to move towards net zero. All the ministries are cooperating and that shapes the national development plans, sectoral policies, industry guidelines and so on. This filters through to energy efficiency projects, transportation initiatives, electrification of the grid, including developments within the aviation or shipping sectors, which are very important to us,” Lim elaborates.

For UOB, the point is to provide sustainable financing for a “Smart City”. UOB has developed what it has defined as ecosystem financing where the various departments in the bank bring together and curate the key companies that will deliver a value chain of solutions on its balance sheet.

For instance, when a customer in a landed property wants to adopt a renewable energy source, say, solar energy, UOB provides the financing for it. The bank also links the customer with solar energy and solar cell providers and companies that install charging terminals for private properties — and even provides electric vehicle (EV) financing.

“We have three solutions: U-Solar, U-Drive (for electrification of the transportation grid); EV for charging infrastructure and U-Energy for energy efficiency for asset owners (such as buildings),” Lim says.

Getting to net zero

In August, DBS is set to publish a whitepaper on how it will “operationalise” its net-zero commitment. “In the run-up to COP26, we made a commitment to be net zero in our finance emissions by 2050, that is, with the emissions, we’re enabling with our lending and financing decisions,” Muenkel says.

For DBS, operating in China, which has a net zero target aimed at 2060, and India, which has said it will aim for net zero by 2070, this could be a challenge. “We want to be a thought leader and work with our clients on these targets,” Muenkel says.

How will DBS achieve its target? DBS says it will quantify its baseline emission. For instance, in the oil and gas sector, the baseline is what the customer is emitting today which will be compared with estimates of what it would be emitting in the years to come.

“You need to connect the starting point with a net zero position in 2050 and we do this by sector. So we’re going to have a different pathway for automotive, different ones for steel, a different form for oil and gas, which is in line with global best practices, because decarbonisation is going to be different for different sectors,” Muenkel explains.

Public-private partnerships may be needed to transition the oil and gas sector to renewables. “Oil and gas is critical to energy security at this point. Countries cannot naively give up energy security. The country and its national development policy for energy with oil and gas players, and the wider economy of players have financing needs. Everyone needs to be able to agree on a roadmap that works and execute to that roadmap,” Lim suggests. “It is very important to get this sector transition, otherwise, we’re not going to get to net zero.”

More than that, the banks have to work in unison on agreed standards. “The goal is to get the main economy to net zero, which should also be reflected in the financing portfolio. Linking oil and gas back to the whole concept of transition pathways, transition finance, this is the hard work of national governments, regulators, oil and gas industry and financial sector,” Lim says.