18 February 2021
From the skyscrapers of Singapore to the river deltas of Bangladesh, the Covid-19 pandemic has drawn attention to global inequities, and expanded the gap between the world’s “haves” and “have-nots”. While banks and governments have been exploring green finance for some time, the pandemic has both highlighted the need for a just financial system and drawn attention to a broader issue facing the world: climate change.
Put simply, green finance refers to finance that incorporates environmental, social and government regulations into business and investment decisions, driving benefits for society as a whole. It signals a shift from the ends-driven model towards one which values outcomes that are good for the planet and its people.
But to build a more planet-friendly financial system, four key elements are needed: effective projects and frameworks, financial tools that work, informed decision-makers and a clear set of funding criteria.
At the most obvious level, green finance makes eco-friendly projects, such as renewable energy, appealing to corporate investors by offering a return. This helps combat climate change both by funding the projects and by channeling capital flows away from carbon-based projects, such as oil and gas exploration.
Yet other impacts can be more subtle. At a national level, green finance programmes have the potential to both shape investment decisions and help drive both financial stability and a long-term focus on fair outcomes and sustainability, says Dr Alfred Hannig, executive director of the Alliance for Financial Inclusion.
“In the developing world, financial regulators are often the most sophisticated institutions, the best educated people, with the best resource base and the very important advantage that they are there with a long-term mandate and very often are not politicised,” Hannig says.
Central banks can help shape climate-friendly policies over longer terms than many politicians manage, he says.
Green bonds, a type of fixed-income instrument used to raise money for climate and environmental projects, are one of the best-known green finance tools. They performed remarkably well amid the turbulence around Covid-19. Between January and October 2020, the world’s institutions issued more than 350 green bonds, raising almost US$170 billion.
Today, green bonds extend beyond the most obvious climate projects. In October 2020, soon after committing to help keep this century’s increase in global temperature below 1.5C, the multinational property company Lendlease issued its first green bond, with SMBC Nikko Securities as its joint bookrunner. In a world where commercial buildings generate 28% of the world’s annual greenhouse gas emissions, with an additional 11% arising from construction, this was a notable commitment.
The US$500 million seven-year bond found no shortage of enthusiasm. “The bond was oversubscribed, indicating a significant demand for financing instruments that will support sustainably driven projects,” says Rajeev Kannan, managing executive officer and deputy head of Sumitomo Mitsui Banking Corporation (SMBC) Asia-Pacific. According to SMBC, the funds raised will go towards green buildings in major urbanisation projects including Singapore’s Paya Lebar Quarter and Sydney’s Barangaroo.
With an estimated US$200 billion of green investment needed every year in ASEAN by 2030, green finance appears to be a growth market.
Already home to a green bond market worth more than US$4.5 billion, Singapore is actively working to grow its green financial sector. Educating a new generation of finance professionals is key to this mission, and Singapore’s Monetary Authority recently announced the Singapore Green Finance Centre (SGFC), a new financial education centre headed by the Imperial College Business School and Singapore Management University and backed by global financial institutions including SMBC.
The centre will equip professionals with skills in climate finance and applied knowledge of Asian markets, offering courses at levels from undergraduate to professional education. “This will develop a strong pipeline of green finance talent, which financial institutions and service providers can tap as they expand teams and deepen green finance capabilities to serve the growing needs of Singapore and the region,” says SMBC’s Kannan, who sits on the centre’s advisory board.
Besides training and talent development, the centre will work hand in hand with the financial services industry on three key research themes, Kannan says. First, researchers hope to transform businesses by integrating climate-related data and environmental, social and governance considerations into the decision-making process. Second, researchers will explore designing strategies and new initiatives to improve the efficiency of green finance markets. Third, they aim to catalyse the development of green finance solutions, broadening the range of products on offer to players within the market and helping expand the sector as a whole.
And this sort of innovation is essential. Kannan says institutions have a real appetite for new and innovative green finance tools, with recent innovations including solutions that allow businesses to buy renewable energy direct from the producer on terms tailored to their appetite for risk.
Done correctly, green finance can help address not only the climate challenge but also the injustice that means people who have contributed least to climate change are the most affected by it. Tools to assess the impact of funded projects are vital for finance to be truly green.
An early adopter of green finance, SMBC is also one of the few organisations in Asia to have voluntarily used the Equator Principles framework to ensure large-scale development projects are environmentally and socially sustainable since 2016. This risk management framework helps determine, assess and manage environmental and social risk in development projects.
An investment in renewable energy can impact rural areas in more ways than merely the direct benefits. “These range from villages getting access to electricity for the first time, to local communities benefiting from a revenue sharing system that improves their livelihoods,” Kannan says.
Yet, in the wake of Covid-19, much more work remains to be done to build a more just financial system.
“SMBC aims to build a society in which everyone can enjoy economic prosperity and wellbeing,” says Kageyama Yoshiaki, co-head of SMBC’s Asia-Pacific division. “Positively impacting the communities where our customers and employees live and work is key to us.”
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