Regulation to be key driver of green economy and its transition

This article was licensed through Dow Jones Direct. The article was originally published on the Business Times Singapore.

SGX managing director says Asia-Pacific region will need US$26-37 trillion worth of investment in energy infrastructure alone by 2050 to meet its decarbonisation goals.

REGULATION is going to play a key role in driving the green economy and the transition towards it in the next 5 to 10 years, opines Singapore Exchange's (SGX) Sustainability & Sustainable Finance head - and businesses need to decide if they want to make the changes necessary to capture the opportunities, or risk being left behind.

Reflecting on the notable and recently concluded United Nations' (UN) climate change conference, COP26, Herry Cho, who also holds the position of managing director at SGX, said it was "heartening" that many important commitments to climate change were made from both the public and private sectors, and that discussions focused more on the "how" than the "why".

"There was an acknowledgement that the 'how' of the global move towards net zero requires more complex, technical work from a multitude of players working together," said Cho, who attended the summit held late last year.

"On that note, it was clear that strong government and regulatory direction had significant benefits for the net-zero transitions in the developed markets."

These, along with cohesive efforts across sectors, are expected to be key in driving the transition towards a cleaner economy in other markets as well.

Cho noted that the Asia-Pacific region, in particular, would need US$26 trillion to US$37 trillion worth of investment in energy infrastructure alone by 2050 to meet its decarbonisation goals, based on estimates made by the Asia Investor Group on Climate Change (AIGCC).

That would amount to 1.7 per cent to 2 per cent of Asia's GDP (gross domestic product), the AIGCC had said in its March report. Noting that the scale of this opportunity makes it the defining investment trend of this century, the group said that companies and governments in Asia will need to work together to achieve these net-zero goals. Action will also be required across a range of fronts - including policy, disclosure and investment.

For South-east Asia, Cho said Bain & Company, Microsoft and Temasek have calculated that the region will need US$2 trillion of investments over the next decade to build sustainable infrastructure to move towards net zero.

"The so-called 'greemium' is therefore significant and will mean opportunities for some, and costs to others, as a result of this seismic transition in our economic system," she said.

Singapore can lead

Cho sees the potential for Singapore to take on a leadership role in the region.

Citing data from Bloomberg, Cho pointed out that Singapore has the largest green and sustainability-linked loans market in the Asia-Pacific, accounting for 33 per cent of Asia-Pacific green loans volume and 36 per cent of Asia-Pacific sustainability-linked loans volume in 2021.

Singapore also has the largest green finance market in Asean, accounting for just over 50 per cent of cumulative Asean green bond and loan issuances, and SGX is the top listing venue for international green, social sustainability bonds in the Asia-Pacific, with an approximate 50 per cent market share, she added.

"Singapore can build on this to fund what is already defined to be green, as well as what needs to be funded in the transition. It is therefore critical that green financing be expanded to accommodate all of these, with Singapore at the forefront."

She said financing that builds on the know-how of climate and net-zero transition for financial institutions and the economy, which is all being worked on heavily now, should be embraced and translated into meaningful financial products that move the needle.

She also believes Singapore has the potential to serve as a verification services hub, such as in the carbon services space; and that it can make use of its position as a leading international financial centre to develop a hub for the structuring of blended financing, which combines concessional financing and commercial funding.

Futureproof or fall behind

Businesses will need to make a decision on whether they want to futureproof themselves and capture the opportunities in sustainable finance, or risk being left behind and face significant disruptions in 10 years' time, if not sooner, Cho said. And she believes that having the first-mover advantage will go a long way.

"To achieve all these, Singapore players need to be part of the local, regional and global conversations, and understand how multilateral development banks, development institutions such as the UN Framework Convention on Climate Change's Green Climate Fund (GCF) and the private sector are planning to work together. With this participation and knowledge, Singapore players can then carve out roles and opportunities for themselves."

As an exchange and a market regulator, she said SGX sees its role "as one of bringing the voice of Asia to international climate finance conversations reflecting the local and regional context, as well as in translating these global developments for the local and regional context".

The Exchange's role

"Exchanges across the world sit at the heart of their respective financial ecosystems, engaging companies and investors across all sectors. SGX, along with other exchanges, can enlist the participation of companies and investors in efforts to channel capital towards net zero transition," Cho said.

The bourse is already doing so on various fronts. On a global level, it is one of the founding members of the Net-Zero Financial Service Providers Alliance, on the Independent Advisory Committee of the UN Sustainable Stock Exchanges initiative (UN SSE), and represented in forums such as the Task Force for Climate-Related Financial Disclosures (TCFD), among others.

"We need to work strategically and collaboratively from different angles if we are to succeed in efforts toward net zero. Local efforts must therefore complement regional and international ones," Cho said.

Some of its more recent local efforts include rolling out a mandatory climate-related financial reporting framework for all Singapore-listed companies, being on the steering committee of the Monetary Authority of Singapore's (MAS) Green Finance Industry Taskforce, and initiating capacity-building programmes such as an introduction to TCFD reporting, jointly held with the UN SSE, the International Finance Corporation (IFC) and the Climate Disclosures Standards Board.

It also partnered banks DBS and Standard Chartered, and Temasek, to launch Climate Impact X (CIX) last year - a global exchange and marketplace for companies to access high-quality carbon credits. Marketnode, its joint venture with Temasek, recently launched ESG bond database, Greennode.

SGX will also soon launch an ESG (environmental, social and governance) data portal, aimed at streamlining the sustainability reporting process for listed companies and providing investors with comparable, high-quality ESG data in an easily digestible format.

It will contain a list of 27 core ESG metrics, developed to provide guidance to issuers on the ESG data to record and report, and to assist investors in accessing relevant data. Cho believes the metrics would enable greater consistency and comparability across companies, and enable trends and best practices to be identified more easily.

"In the longer term, the platform is intended to be extended to non-SGX listed companies under MAS's Project Greenprint (launched in December 2020 to harness innovation and technology to promote a green finance ecosystem through helping to mobilise capital, monitor sustainability commitments, and measure impact)," she said.

Still, while a wide range of resources and support systems are available in Singapore and globally to corporates to help them effectively manage and harness the opportunities in the transition to a cleaner economy, Cho recognises that more can still be done for them.

For example, while resources and support are available on technical issues such as carbon accounting, transition finance and sustainable investing, Singapore's status as a global and regional hub for many industries, including the financial industry, does add complexity.

"A common understanding between the real economy and the financial community must be found on sustainability issues such as how net zero transitions can be achieved while taking into consideration the social and other environmental factors," she said.

She also believes that the expertise on the efficient implementation of net zero transition across all sectors needs to be consolidated, and that more efficient support for scenario planning under TCFD is needed. Carbon accounting, while relatively established here, is due for evolution as well.

"Last but not least, corporates would require guidance on how they can better capture climate-related opportunities," she said.

Cho said the Exchange intends to continue acting as a facilitator for conversations between local, regional, and global investors of capital markets, while collaborating with global networks to help ensure that the needs of local markets are met.

This is the 17th in a 20-part Green Business series, in collaboration with UOB, exploring sustainability trends across businesses and industries.