Commentary: Forces of climate action are reshaping finance in Singapore and around the world
A stronger-than-ever business case and the current pandemic call for finance to go green, says WWF-Singapore.
SINGAPORE: It’s easy to think of climate change as a distant issue that would affect other countries, when Singapore, at first sight, does not seem prone to extreme weather events such as the recent flooding in China or bushfires in Australia.
But most of us sat up when Prime Minister Lee Hsien Loong announced a goal of spending at least S$100 billion for adaptation to rising sea levels at the National Day Rally in August 2019. And in Singapore’s urbanised and humid environment, increasing heat is a real health concern.
His announcement framed further changes underscoring the looming climate emergency and the steady realisation that countries, communities and businesses must retool themselves for that future.
The global financial community too, is grasping this new reality and its implications for investments.
“Climate change has become a defining factor in companies’ long-term prospects … Every government, company, and shareholder must confront climate change” investment powerhouse BlackRock CEO Larry Fink said in a groundbreaking set of letters to their clients and investees in January.
These outlined how the firm will shift gears to place “sustainability at the center of [their] investment approach”, to reduce their risk exposure and provide better returns to clients.
There is growing worldwide momentum from financial regulators and institutions to promote sustainable finance, fulfil environmental, social and governance (ESG) goals and hedge against rising environmental risks.
Here in Singapore, there has been a mushrooming of initiatives geared towards this new landscape.
The Monetary Authority of Singapore (MAS) announced a US$2 billion investment last November to develop green markets. MAS also recently released a consultation paper on new guidelines to manage environmental risks for financial institutions.
SUSTAINABLE INVESTMENT SHOWING POSITIVE RETURNS
Since socially responsible investment practices first emerged in the 1960s alongside anti-war and civil rights movements, sustainable investment has evolved to cover a wide range of approaches.
These range from investing in low-carbon sectors such as renewable energy or excluding financing harmful activities such as tobacco, to investing in companies that manage their environmental and social impacts. For example, palm oil companies that commit not to clear forests and to respect human rights in the course of doing business.
These expectations from investors have contributed to the widespread development of stakeholder capitalism globally.
This translates to businesses and financial institutions alike integrating ESG considerations in their strategies and operations.
In Europe, half of total assets under management in 2018 were defined as sustainable, and in Japan such assets quadrupled from 2016 to 2018. And while there is not yet a single definition for sustainable investments, the urgency of climate change has lent sustainable investing sharper focus and greater urgency.
A key misperception is that sustainability means investors have to accept lower returns. This is not the case, particularly true as impending technological and policy developments will make sustainable investments increasingly attractive.
Despite the massive social and economic shock brought by the COVID-19 pandemic, it has highlighted a trend that has become increasingly clear - with sustainability funds outperforming the market, both in developed and emerging markets.
In the first quarter of 2020, returns of two-thirds of global sustainable equity funds ranked in the top half of their category.
An increasing body of research suggests that sustainability translates to resilience to external shocks. A review of over 200 studies by Arabesque and the University of Oxford in 2016 found that companies with good sustainability practices tend to have better operational performance and a lower cost of capital.
Sustainable funds have seen also record inflows this year, including in Asia, which demonstrates investors’ increasing interest for sustainable assets.
FUNDAMENTAL CHANGES ARE UNDERWAY
Certain structural changes, including in the regulatory landscape, suggest the smart money is on going green.
Major Asian asset owners such as Japan’s Government Pension Investment Fund and several of Singapore’s largest asset managers recently signed up to the UN-supported Principles for Responsible Investment, which gathers investors representing US$90 trillion of assets under management that commit to responsible investment practices.
A growing number of leading asset owners and investors have joined forces in collective engagement initiatives, driving shifts in the sustainability practices of the companies they invest in.
Another key trend is the shift away from fossil fuels, and coal in particular. An increasing number of investors and banks, including major Japanese and Singapore banks - such as the Japan Bank for International Cooperation, MUFG and DBS - have taken steps to reduce finance to coal-related activities, which are increasingly unprofitable and reliant on subsidies.
This evolution has been aided by fundamental changes in the energy markets. Thanks to rapidly falling costs, according to financial think tank Carbon Tracker, new solar power projects in Vietnam and Indonesia are expected to be cheaper than existing coal within the next 10 years.
Countries are already shifting their focus. Bangladesh recently announced it may scrap 90 per cent of planned coal plants while Vietnam may also shelve half of its pipeline of coal projects.
However, the shift is not happening fast enough and many institutions are still exposed to risky, carbon-intensive, projects. In particular, with oil prices at historically low levels, investors should consider increasing calls for governments to reform costly fossil fuel subsidies.
There are also more calls to set higher standards for sustainable finance around the world.
The Network for Greening the Financial System (NGFS) is a coalition of central banks and supervisors that has grown to about 70 members, with increasing representation from Asia.
Since its launch in December 2017, it has produced a number of landmark reports and guidance, with the goal to share good practices, accelerate the understanding of climate-related and environmental risks and how they can be managed, and foster the development of green finance.
COVID-19 SHOULD NOT SET US BACK
2020 was supposed to be a “super year” for biodiversity and climate, with signatories to the Paris Agreement to submit updated pledges to reduce greenhouse gas emissions, and the Convention on Biological Diversity to be held in China.
With COVID-19, these milestones have been pushed back. Despite calls from institutions such as the United Nations and the World Bank to “build back better”, there is concern that countries around the world may be slowing down sustainability efforts, with some governments even rolling back environmental legislation.
In Brazil, for example, illegal deforestation has soared as the Bolsonaro government loosened environmental law enforcement.
The International Energy Agency (IEA) also expects global power investment to fall by 10 per cent in 2020, sparking worries the deployment of clean energy could be derailed.
Similarly, corporations may put sustainability on the back-burner. A recent GlobeScan survey of around 100 large global companies found that around half expect cuts to their sustainability budgets over the next 12 months.
However, government policies should support sustainability efforts and the growth of sustainable finance, to attract fresh investments to build needed infrastructure that not only mitigates growing climate risks but also create new business opportunities and jobs.
This is a win-win for national governments and companies in Southeast Asia and beyond.
It has been shown that investments in sectors such as energy efficiency in buildings and afforestation can create respectively six and 15 times more jobs than in the fossil fuel sector, according to estimates by WWF that build on various academic studies. Embracing sustainability principles would also attract investors.
THE CRISIS IS AN OPPORTUNITY TO ACCELERATE TRANSITION
The coronavirus should also remind us of the urgency of tackling the growing climate and environmental crises we face.
The United Nations, World Health Organisation and WWF have warned that more pandemics are likely in the future unless the destruction of nature is halted, and greater attention should be devoted to addressing these issues.
First, policymakers should direct recovery efforts towards sectors that contribute to a low-carbon, resilient, and more equitable economy.
Green strings could be attached to financial support. For instance, car manufacturers and airlines that receive support should be required to invest in clean transportation.
Fossil fuel subsidies should be abolished as they distort markets, and governments must strengthen commitments under the Paris Climate Agreement.
Second, companies should take steps to transition their business models, for instance, setting targets to reduce emissions and limiting the impacts of their production or sourcing on natural environments.
Third, the financial sector should fully play its role, by working with clients to support sustainability commitments, identifying financing needs and accelerating change through innovation. New emerging products such as bonds whose pricing is linked to sustainability targets can be used to support the necessary transition.
Central banks and financial regulators should take actions to address risks in the financial sector. This can come through harmonised standards across countries and regions that reduce risks of greenwashing while facilitating cross-border investments.
We need to ensure the positive trends in sustainable investment witnessed before the pandemic are not just continued, but amplified. The stakes could not be higher.
Sylvain Augoyard is Vice-President, Asia Sustainable Finance, WWF-Singapore. Dr Helena Wright is Vice-President, Sustainable Infrastructure & Energy Finance at WWF-Singapore.