Five observations for ESG and Green Financing in Asia 2021
Governments, regulators, and consumers – especially the younger generation – are paying increasing attention to environmental, social, and governance (ESG) factors when making investment decisions. What does this mean for business leaders in the year ahead?
- A combination of top-down policies and bottom-up initiatives will strengthen the momentum for greater ESG push in post-COVID Asia.
- But Asia’s unique dynamics require tailored green financing solutions – what works in other parts of the world will not yield the same results.
- Companies that are still brown or light green but keen to accelerate their green transformation can – and should – be eligible for financing.
- More than a means to establish ethical business practices, ESG metrics are increasingly recognised as indicators of robust risk management strategies.
- Leaders in Asia should leverage transition financing now to catalyse business transformation and take their companies to the next level of growth.
Singapore is ASEAN’s green financing hub, accounting for over 50 per cent of green financing activity in the region. In the last 18 months, approximately SGD 4.8 billion in green and sustainability bonds have been issued in Singapore alone. Singapore corporates also borrowed SGD 10.2 billion through green and sustainability-linked loans in the same period, effectively tripling the volume of green and sustainable financing since 20181 .
Business and policy leaders agree that ESG has risen in importance, even during the COVID-19 period and especially in Southeast Asia. The launch of the Singapore Green Finance Centre (SGFC) in October 2020 is key indication of that – the institution is the first of its kind in the world, centred on Asia-driven green finance research and talent development, and a landmark for sustainability in region. With a focus on climate science, financial economics, and sustainable investing, it is ratification of strong interest and commitment to ESG in the region.
According to Alvin Tan, Singapore’s Minister of State for Trade & Industry (MTI) and Culture, Community and Youth (MCCY), “The pandemic may be the most dangerous crisis this generation has faced, but it has also presented us with an opportunity to think about how to build a greener, more sustainable economy, and to turn disruptions caused by COVID-19 into new areas of growth. Protecting our environment and capturing new economic opportunities are not binary.”
DBS’ Tan Su Shan, Managing Director and Group Head of Institutional Banking, and Yulanda Chung, Head of Sustainability of Institutional Banking, participated in a recent event organised by the Association of Corporate Treasurers (Singapore) (ACTS), which brought together various stakeholders in the finance and treasury ecosystem to explore the future of ESG and green financing in the region. Together they outlined five key takeaways for business leaders covering Asia’s unique ESG challenges, opportunities and considerations for 2021.
- ESG will become increasingly relevant in post-COVID Asia
ESG will continue to rise in importance because consumers increasingly care about the bigger picture and are making decisions based on how ESG-conscious businesses are.
“I like to think that doing good now is equivalent to doing business,” shares Tan Su Shan, Group Head of Institutional Banking, DBS. “Shareholders, investors and customers are going to be intolerant of purely profit-motivated businesses that don’t care about their externalities, or that engage in bad behaviour.”
“And this intolerance is manifesting itself in pure outperformance of ESG investments in terms of shareholder returns, in both up and down markets. I’ve been given a performance index of ESG-compliant companies versus the market, and even in a down market during COVID, the ESG bucket way outperformed. So, people are really putting their money where their mouth is, whether it’s to support E or S or G.”
- Asia’s unique sustainability challenges require urgent solutions
While it is important for leaders to seize global demand for sustainable goods and services, it is equally important to be mindful of the unique challenges of the region – what has worked for other parts of the world will not necessarily yield the same results in Asia.
“While it is true that Asia has more to catch up with in terms of sustainability, we cannot do so blindly,” notes Lim Bey An, Head of the Green Finance and Asset Management Division at the Monetary Authority of Singapore (MAS). “It's important to weigh any policy against economic and social consequences, to take action but also be careful in terms of the region’s unique dynamics.”
Green financing in Asia must be compatible with both short and long-term goals. Asia’s economies are still growing, and fossil fuels will continue to play a critical role in that growth, so transitioning will be the main focus for the region.
- Transition financing is about inclusiveness
“We have to look into the economics and dynamics of where countries are at this point in their sustainability journey. It's impractical to demand the adoption of the leapfrog doctrine when those dark green solutions are not yet commercially available,” says Yulanda. Many businesses in Asia remain hesitant for green financing due to fear of greenwashing accusations, prompting the need for a more tailored solution to tackle the region’s sustainability challenges.
“This is why we launched our Sustainable and Transition Finance Framework and Taxonomy in 2020, and we're Asia's first commercial bank to come up with such a framework, because we find that transition is particularly apt for this part of the world,” she explains. “We use that framework to pinpoint incremental but instrumental solutions for companies in fossil-fuel-reliant industries to be able to tap into the sustainable finance market. No company should be excluded as long as the long-term decarbonisation goal is in place.”
- To invest in ESG is to invest in risk management
As shared by Su Shan, ESG-compliant companies consistently outperform the market and have remained strong even during the pandemic. COVID-19 has actually highlighted the market advantage of investing in sustainability, and ESG ratings are being recognised an indicator of strong long-term business models.
“A big trend we notice when we speak to clients is that if their ESG performances are not satisfactory, it’s actually an opportunity to explore transition financing,” shares Yulanda Chung, Head of Sustainability, DBS Institutional Banking Group, as green practices play a role in uplifting productivity and increasing top-line growth.
Foreign entities looking to invest in Asia will also increasingly prioritise ESG factors because of their high-performance track record. Ambassador of the Netherlands to Singapore and Brunei H.E. Margriet Vonno indicated strong interest from European governments and corporations in investing in environmentally and socially responsible businesses in Asia, especially since it aligns with their commitment to the Paris Agreement and the United Nations Sustainable Development Goals.
- ESG must not become just another vanity metric
As sustainability will play a key role in future investment (and overall business) strategies, it’s important to ensure that rigour is maintained in assessing suitability for green financing – only then will it continue to have real impact on our economies, societies, and environment.
“While we try to broaden the addressable market, the MAS is also trying to make sure that we set a high bar, to make sure that some of these instruments continue to be high quality, that they remain credible, trusted, and there is no greenwashing,” cautions Bey An.
Yulanda echoes these sentiments, sharing that DBS’ Sustainable and Transition Finance Framework and Taxonomy is exactly meant to retain transparency and accountability in green and transition financing.
“We want to make sure that companies actually transition,” Yulanda shares. “That means when we evaluate transition credentials, it's not just about the asset or that particular new technology that we are financing. We evaluate the borrower as a whole and assess their overall decarbonisation strategy.”
COVID-19 has very clearly demonstrated the positive impact of ESG-compliance on a company’s performance and profitability. More than just a metric for gaining access to capital mobilisation, ESG is about managing remote risks and opportunities that may not be material right now but can make a significant difference in the long-term. This is especially the case when it comes to future ESG-related policies, regulations, and potential reputation risk in a region like Asia, where the legal and regulatory landscape is still unfolding.
In the year ahead, leaders must continue to drive ESG as part of their resilience strategy, in addition to (or even as part of) the ongoing restructuring necessary to navigate these difficult times. Embarking on ESG efforts with a view on the broader suite of stakeholders beyond investors and lenders will differentiate the companies that are able to realise the full business transformation potential of adopting sustainable practices.