Other parts of this series:
This series of blogs looks at the opportunities and challenges associated with green finance in Southeast Asia, and draws on the Green Finance Position Paper 2020 by Eurocham Singapore, and co-authored by Accenture, that assessed the state of green finance in Singapore and ASEAN.
From Europe to North America to Asia, green finance is emerging as a major asset class. In 2019, the global issuance of green bonds and green loans reached US$258bn, according to the Climate Bonds Initiative, marking a rise of more than 50 percent on the previous year (see chart).
What about ASEAN? Issuance from the 10-member bloc almost doubled year-on-year to US$8.1bn. Singapore leads the bloc in sustainable finance issuance, and aspires to become the region’s green finance hub.
Although the increase in sustainable finance is impressive, ASEAN punches below its weight relative to its share of global GDP and growth. That makes the proposals in the recently published EuroCham Singapore paper timely. In short, the report finds that to grow sustainable finance, the region needs to:
- Drive the convergence of green finance standards
- Improve ESG ratings practices
- Build a green finance talent pool
- Leverage technology
In this blog, the first in a series of four, I’ll explain why green finance standards need to converge.
Clean – but perhaps too green?
Corporate, commercial and SME loans are currently assessed on the basis of a borrower’s ability to repay, but we expect this will evolve. In the not-too-distant future, most (if not all) lending to companies large and small will be evaluated through an additional green lens that will assess how green the company’s business is and the purpose to which loans are put. As a result, “greener” companies will benefit in the ways that firms with stronger credit ratings do today – with better rates and terms.
That’s one effect of the “push to green”. Another, which has been building for years, is increased pressure on firms to boost their green credentials. You don’t have to look far to see how tempting it is for businesses large and small to appear green – or, at any rate, greener than they are. A simple Google search lists a veritable who’s who of global names that have exaggerated their green credentials or even outright cooked the books. Additionally, with banks and investors increasingly keen to lend to green projects and companies, the opportunities for the unscrupulous have risen.
This has made “greenwashing” a global, and growing, challenge. Greenwashing is the practice whereby companies access green loans or green bonds for green purposes – cutting carbon dioxide emissions, for instance – but instead:
- Use the proceeds for non-green purposes
- Overstate the impact the funds had
- Fabricate the data used to measure the impact
- Or simply claim to be green without providing proof
Part of the challenge is the variety of standards in ASEAN. Standards from the Monetary Authority of Singapore (MAS) focus on climate risk, for example, while those from Bank Negara Malaysia seek to encourage the growth of Islamic green finance and green tech companies. That makes it harder for lenders and investors to draw comparisons.
In addition, different providers rate against these standards, and there are many ways in which standards can be used. This lack of convergence leaves room for interpretation and false representation, resulting in a lack of comparable data (as I’ll explain in a later blog). Greenwashing is one consequence, but another is higher costs because interested buyers must carry out their own research. Ultimately, these complexities turn off potential investors.
However, all hope is not lost, and much can be done. For starters, more transparency is needed into how green finance ratings are calculated, because investors currently rely on third-party providers and/or on self-reporting by the issuing company – a case of the fox guarding the henhouse. Additionally, the metrics used to measure and monitor solutions should be standardised, while independent tracking of impacts would hinder greenwashing.
The approaches taken by Sweden and China are instructive. In Sweden, third-party providers rate green bonds, while issuing companies self-report their impact. This traditional approach relies on trust and the companies’ desire to protect and enhance their brands to keep players honest.
China, which is Asia’s largest issuer of green bonds, took a different approach by embedding technology and standardisation of metrics into its solutions.
In my view, a combination of these approaches could feed into a framework for ASEAN nations to follow.
As I see it, the end goal for ASEAN should be a tiered system of standards: a global standard, as defined by the UN and global entities like the World Economic Forum, and national standards that are aligned with the global standard including those from, for example, the Sustainability Accounting Standards Board (SASB), the Taskforce on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI).
For example, if there are 50 global metrics, Singapore could choose to implement the 20 most relevant to its context (carbon dioxide emissions or water quality, for instance), while Indonesia could select 25 that best fit its requirements (air quality or water preservation, say). Although each country would have its own rules, they would be based on a standard catalogue. This would provide flexibility for local needs, while ensuring investors and banks had a set of consistent, measurable metrics.
Note that I’m not talking harmonisation – that’s too idealistic – but something closer to banking regulations where each country’s requirements align with global rules. This makes it easy to measure and compare, for example, Tier 1 and Tier 2 capital at banks in Malaysia, Singapore and Indonesia.
Consistency within a standard green finance framework would improve transparency and trust, create comparable metrics and – by cutting the friction of green lending – make it less costly and less cumbersome to rate and underwrite new green bonds and loans. This would see ASEAN take an important step in accelerating the growth of green finance.
The next step constitutes the second recommendation in EuroCham Singapore and Accenture’s paper and is the subject of my second blog: improving ESG ratings practices.