As countries intensify their activities to overcome climate change, institutional investors and financial institutions are responding by embracing sustainable and green infrastructure projects in investing mandates. This has given rise to ‘green or sustainable finance’ where investment and lending by financial institutions will consider environmental, social and governance (ESG) aspects, on top of other criteria.
This is timely since growing evidence on climate risk has underscored the urgent need for investment, particularly for sustainable infrastructure. An estimated USD 5 to 7 trillion of infrastructure investment is needed each year till 2030 to meet climate and development objectives1. To mobilise investments such as those for sustainable infrastructure, countries will need to focus on key parameters, such as increasing the supply of bankable and viable sustainable infrastructure projects, raising the attractiveness of local currency green bonds and structuring clear reporting standards for green investments.
Sustainable finance is social responsibility
Sustainable finance places importance in the role of social responsibility within investment decisions. Socially responsible investing has gained traction in recent decades, prompting various categories of institutional investors, such as pension funds and insurance firms, to recalibrate their long-term investment risk models2..
There may be different approaches to sustainable finance. Some investment standards aim to make a positive contribution to sustainable development, while others simply adopt a “do-no-harm” approach with ESG criteria integration. Sustainable finance can thus be divided into two categories:
- Negative sustainable finance involves screening potential investments according to their performance on the three ESG dimensions, with the primary objective of doing no harm across sustainability goals;
- Positive sustainable finance refers to investments that have potential for significant social or environmental impact, typically aligned with the United Nations’ (UN) Sustainable Development Goals (SDGs).
Three factors are expected to power growth in sustainable finance going forward. First, commitments from corporates and governments towards a net-zero carbon emissions roadmap should incentivise sustainable finance, while increasing scrutiny on sustainable projects. Second, the rise of innovative and alternative sources of capital should help drive demand for such projects. Lastly, evolving regulatory frameworks and guidelines are set to provide more clarity and certainty in coming months.
Sustainable finance gains momentum in Asia-Pacific as Singapore leads the way
The demand for sustainable financing is rising across Asia-Pacific (ASPAC) countries. Among ASPAC countries, Singapore leads the way, reflecting its commitment to advancing sustainable finance. With the aim of being the lead in green finance in Asia and globally3, the Republic is encouraging its financial sector to promote sustainable development opportunities.
Moving in step with the country’s ambition, the Monetary Authority of Singapore (MAS) has launched various initiatives to propel green finance, including grants to support sustainability-linked lending, as well as provisioning up of a USD 1.8 billion to five asset managers for climate-related investments. The government has also launched a green bonds initiative to tap on sustainable funds for public sector projects. These efforts are geared in part towards the roadmap of Singapore’s Green Plan 2030, a whole-of-nation movement that identifies marked by achieving specific green targets over the next 10 years4.
Elsewhere in Asia, sustainable investments are also gaining ground. Japan is seeing a fast rise in sustainable investments with relevant assets managed growing from just USD 7 billion in 2014 to USD 474 billion in 2016 and quadrupling to USD 2.18 trillion in 2018, according to the Global Sustainable Investment Review. Total sustainable investment assets now account for 18 percent of all professionally managed assets in Japan5.
Other sustainable finance measures are picking up pace across Southeast Asia as well. In 2019, the World Wide Fund for Nature (WWF), in conjunction with the Thai Bankers’ Association, released a series of official guidelines that enable financial institutions to develop capabilities to handle ESG risks. WWF has also been working with Indonesia and Malaysia on similar guidelines for sustainable financing6.
The Principles for Responsible Banking launched by the United Nations (UN) Environment Programme Financing Initiative in 2019 are also likely to re-orient lending policies towards sustainable goals across the ASPAC region. Under these principles, banks commit to align their business strategies with the goals of the Paris Agreement on Climate Change and the UN’s Sustainable Development Goals7.
New sources of finances help spur global shift towards impact economy
Specific to sustainable urban infrastructure, many new sources of financing have become available over these years. Financiers are earmarking capital for sustainable and green infrastructure projects through products that drive financial returns by creating social and environmental value. To this end, the SDGs are a powerful framework to steer structured investments towards long-term financial value and impact. This, in turn, lays the foundations for the global shift towards an “impact economy”, a system in which financial and social returns are complementary and help to ensure a sustainable future8.
Green bonds and loans have emerged as attractive investment propositions. Around USD 270 billion of green bonds were issued in 2020 and this is expected to climb to USD 375 billion in 2021, according to a leading global ratings agency9.
Significant milestones have recently been clocked in infrastructure green financing in Singapore. In 2019, a leading Singapore-based real-estate company raised SGD 500 million in two green loans, the first time such financing was used for new property developments10 in the country. In February 2021, an infrastructure and urban development consultancy firm successfully priced its SGD 250 million sustainability-linked bond. This issue marked the first Singapore dollar-denominated sustainability-linked bond and the first public sustainability-linked bond issue from a company based in Southeast Asia.
Sustainable finance has the potential to unleash a wave of innovative investments for infrastructure projects at the global level, particularly in emerging markets. Of this, about half of transition financing needs in the next 20 to 30 years is expected to come from Asia11. The growing pool of alternative capital, including institutional capital, is expected to plug the financing requirements for transition in the region.
In particular, the infrastructure sector in ASEAN countries will require a major chunk of the green financing. The annual ASEAN green financing opportunity has been estimated to be about 2.5 times the size of the entire 2016 global green bond issuance. This means that the total annual green investment will need to increase by 400 per cent to ensure that ASEAN green investment opportunities are met by 203012, highlighting the region’s immense potential to grow and transition to a sustainable future.
There remains scope for introducing new types of financing instruments, such as asset-backed products, guarantees, forms of blended finance and local currency denominated green bonds. Blended finance, the use of catalytic capital from public or philanthropic sources, provides an important alternative because they help create risk and return profiles that match the needs of private investors, thereby mobilising investments13. Another type of instrument is local-currency denominated green bonds, which governments can look to promote through favourable domestic policies.
Greenwashing poses major risk for sustainable investment
One of the biggest challenges in mobilising sustainable finance is ‘greenwashing’, the practice of channelling proceeds from green finance towards projects with negligible or negative environment benefits. The lack of a clear definition of sustainable finance has amplified the risk of greenwashing, owing to ambiguity on sustainability-linked targets.
Greenwashing carries serious reputational risks for investors and governments, creating an increased sense of urgency to stamp out this practice. The Sustainable Finance Disclosure Regulation (SFDR) in the European Union (EU) is part of the bloc’s efforts to push genuine sustainable investing by requiring ESG products to disclose how their sustainably branded products address climate change, among other requirements. The introduction of this regulation in the EU may cause ripple effects across Asia and Singapore, amid growing calls for an SFDR-equivalent rule to drive concerted action and transparency.
An industry-led taskforce facilitated by MAS in Singapore is currently developing a taxonomy of projects and companies eligible for green financing. In this regard, the World Bank’s recently published guide on developing national green taxonomy14 helps address the need among financial market participants for clarity and transparency in what is understood and what qualifies as green.
For green finance lenders, there is also a lack of agreed on reporting frameworks. This is because a majority of the lenders neither disclose their accounting methodology nor have plans of reporting progress on such commitments15.
Investors also may face difficulties finding investment grade projects, given the challenges associated in aligning sustainable goals with economic development. Too few projects may be meeting the “risk-return” profile that traditional investors are interested in. Governments and development banks therefore need to focus on providing support in project-preparation facilities and technical assistance to increase the “bankability” of such projects.
In summary, the growth sustainable finance in infrastructure requires the coordinated efforts of stakeholders across governments, investors, corporates, and financial institutions. Establishing standards, impact measurement frameworks and taxonomies will help create a common language in sustainable finance. This, in turn, will help build the trust and transparency that is essential for propelling growth in green trade and financing.