Shades of green: Banks take bigger steps toward greener finance amid climate change push
As countries around the world look for ways to bounce back post-COVID-19, there’s been greater emphasis on building back better and greener. Chubby Jayaram Singh looks at how Singapore banks can ride on this wave of opportunity.
SINGAPORE: The financial sector is taking incremental steps to turn their portfolios green and play their part in the fight against climate change, amid greater concern and awareness over its impact on the environment and economy.
While the effects of climate change are felt globally, Southeast Asia is expected to sustain a greater economic impact than other regions, according to the Asian Development Bank.
If left unchecked, climate change could shave 11 per cent off the region’s gross domestic product (GDP) by the end of the century, ADB has said.
But while climate change poses a significant threat to the region, it also presents significant opportunities for green financing to flourish.
Experts see significant demand for new investments to decarbonise economies going forward. And Singapore banks, they said, are well-positioned for it.
"Singapore being a key financial centre, it’s well positioned to plug some of these massive financing gap in more sustainable ways," said Mr Willie Tanoto, an analyst at Fitch Ratings Singapore.
"The Singapore banks have recognised this early and they are coming out of the gates running," he added.
Strong regulatory support and government-led incentives have helped the growth of green finance in Singapore.
One example is the US$2 billion green investments programme, which was launched by the Monetary Authority of Singapore in November last year to invest in public market strategies that have a strong green focus.
The scheme gives out grants to defray the cost of green certification for borrowers to access both green loans and green bonds. It also brings together industry working groups, and works towards consistency by harmonising standards and regulations.
These initiatives have produced tangible results. All three Singapore banks made it to the top of Bloomberg Asia's most recent green loans league table.
“Banks in Singapore have come out and made public commitments towards not only managing carbon emissions and sustainability programmes for their own operations, but also making commitments towards green financing," said Mr Mohit Grover, South East Asia sustainability leader at Deloitte.
"They are holistically looking at climate risks and environmental change aspects, and then incorporating the risk management aspects. And crucially, they are realising the opportunities that exist in funding the green economy," he added.
Still, analysts say the amount of sustainability-linked loans issued by the banks pales in comparison to their overall loan book.
“If a bank issues a record S$10 billion of new green loans in one year, that would be huge. But relative to the existing portfolio of S$300 billion or so, it is not going to immediately move the needle," said Fitch's Mr Tanoto.
"It is going to take time to turn the portfolio green and until then, you are just going to have to deal with sceptics who say this is just lip service or this is just a public relations stunt. But it is actually an incremental step in a relatively long race," he added.
OCBC aims to grow its sustainable portfolio to S$25 billion by 2025, while DBS is committed to financing S$20 billion in renewable, clean-energy and green projects by 2024.
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Market watchers said that banks are making strides in product innovation and diversification. Instead of simply attaching a couple of green conditions to refinance loans and calling it "green", they have come up with new products such as green sukuks, or financial instruments that comply with Syariah law.
Banks are also increasing their lending to the non-property sector, such as renewable energy or waste and water management.
“Low carbon is something that needs to be thought of or funded. These are capex investments that the banks would have to invest in or fund. And increasingly, some of these structures are consortium-based and therefore needing regular monitoring and reporting back,” said Ms Cherine Fok, director of impact and sustainability advisory at KPMG Singapore.
As governments in the region rebuild their economies amid the COVID-19 crisis, there has been an increasing focus on building greener economies.
Singapore banks, while well-positioned to ride this wave of opportunity, will have to establish where they stand in the “green” spectrum.
"In order to capture these opportunities, banks will have to start with their own frameworks, to be able to identify where are the environmental and social outcomes that they are supporting, be able to then measure them and then make an assessment as to where they would be directing their efforts," said Ms Fok.
The Center for International Climate Research uses three shades of green to assess whether a given activity or technology supports a low carbon and climate resilient society in the long-term.
Dark green is allocated to things such as wind energy projects that correspond to the long-term vision of a low carbon and climate resilient future.
Medium green refers to projects such as plug-in hybrid buses that represent steps to the long-term vision, but are not quite there yet.
Light green is allocated to projects that are environmentally friendly but do not contribute to the long-term vision.
DBS Bank’s head of sustainability, institutional banking Yulanda Chung said the bank wants to scale up sustainable finance.
Sustainable finance is the practice of integrating environmental, social and governance criteria into financial services to bring about sustainable development outcomes, including mitigating and adapting to the adverse effects of climate change.
“That means we have to finance not just the dark green. We need to move into areas that may not be as green as it we would ideally want them to be. Examples are heavy industry, such as cement production, steel production, mining and metal smelting, sectors which require the use of fossil fuels," said Ms Chung.
"It is actually very difficult now to find commercially viable, affordable solutions that are greener. There are some, but it may take some time for them to become truly scalable and in the meantime, we believe we should still encourage customers to adopt better solutions,” she added.
Choosing a greener path could also reap rewards for the banks in the long run.
"From a long-term basis, very clearly, these sustainable finance instruments are going to be helping banks, not only in terms of their profitability but the consumer perception and the overall brand the bank stands for," said Mr Grover.