Unlocking transition finance for Singapore’s future

Southeast Asia is at a crucial stage in its transition towards becoming a low-carbon, climate-resilient economy. If we are to accelerate this, the allocation of capital and solutions needs to evolve, not only increasing investment in carbon-efficient technology and green projects, but also incentivising existing hard-to-abate sectors to become greener at a reasonable cost.

Earlier this year, Singapore outlined bolder plans to ramp up its sustainability ambition and become Asia’s leading green city. Notably, carbon taxes are slated to rise to S$50-80 by 2030, a move that spells a significant change for industries with high carbon emissions.

Corporate call to action

At the start of 2022, the Singapore Exchange updated its listing rules requiring “issuers to disclose their Scope 1 and Scope 2 greenhouse gas (GHG) emissions, with Scope 3 GHG emissions to also be disclosed, if appropriate”.

Carbon emissions still remain largely outside mainstream financial analysis, but as the broader social and economic costs of climate change and environmental degradation become clearer, corporates are also facing increasing pressure from broader stakeholders to provide actionable plans that go beyond reducing their own specific carbon emissions and examine that of their entire supply chain, otherwise known as Scope 3 emissions.

On an average, 80 per cent of a company’s carbon footprint resides in its supply chain. The onus, therefore, cannot fall solely on larger corporates; it’s incumbent on regulators, governments and financial institutions to enable the transition of the whole chain.

Financing a challenging pivot

HSBC’s recent Navigator survey revealed that whilst Singapore’s leadership in sustainability is a key factor in doing business from Singapore for international companies with Southeast Asian ambitions, 29% of firms worried that the impact of new regulations and rules on carbon reduction could challenge their business.

Banks and other financial institutions can ease the transition by acting as a catalyst for change. We can lower the cost of financing low-carbon options like renewable energy and sustainability-linked supply chain finance especially if regulators make it imperative that a greater proportion of new lending is orientated towards sustainability and transition finance; and if governments can create a carbon-based asset class through pricing schemes, we can help create the markets to make the assets tradeable.

Capital markets are also offering more financing solutions. Sustainability-linked loans (SLLs) or bonds (SLBs) are a relatively new, but rapidly expanding, entrant into the environmental, social and governance (ESG) debt arena. A recent Climate Bonds Initiative report, supported by HSBC, saw the combined volume of ASEAN SLL and SLB instruments reach USD27.5bn in 2021, up from USD8.6bn in 2020.

These sustainability-linked instruments typically include pricing adjustments if the borrower achieves specified sustainability or ESG targets - for example, lowering carbon emissions intensity. Achievement of the agreed targets results in financiers agreeing to accept a lower return in exchange. To facilitate an effective long-term transition, meaningful targets have to be set to ensure that financial institutions incentivise behaviour that is aligned to what is required to decarbonise and support the transition of the global economy.

Transition roadblocks

Yet, the problem is not a lack of capital. The Climate Bonds Initiative report also revealed that the ASEAN sustainable debt market continued to grow rapidly in 2021, setting an annual issuance record for green, social, and sustainability (GSS) bonds and loans at USD24bn, with an additional USD39bn of sustainability-linked bonds and loans.

Notably, Singapore remained the regional leader, with GSS debt issuance of USD13.6bn in 2021 compared to USD4.9bn in 2020.

Both the money and the investment opportunities are there, but they struggle to connect. The biggest constraint is creating the right contractual environment to enable funds to flow. To effectively connect capital to green projects, a transparent system that defines and rates environmental risk in the same way that global ratings agencies categorise and rate financial risk needs to be established.

The work has already begun. Transition activities have been taken into account in taxonomies developed in the region, such as the Singapore and ASEAN taxonomies. These taxonomies put forth a “traffic-light” system, which classifies activities according to their alignment with environmental objectives into green, amber or red, with the amber colour used for transition activities. This is a good start and further standardisation will undoubtedly bring even more benefits.

In addition, the ASEAN Working Committee on Capital Market Development and the ASEAN Capital Markets Forum has established an Industry Advisory Panel to engage the private sector on sustainable finance. On the Industry Advisory Panel, HSBC chairs a dedicated Working Group focused on Transition Standards, identifying transition principles and exploring sector-specific decarbonisation pathways suitable for the region.

A data-fuelled approach

Another key obstacle for banks in accelerating the net zero transition is in collecting reliable and comparable data from corporates to assess risks, identify opportunities and enable the right actions.

Earlier this year, HSBC partnered with the Association of Banks in Singapore to launch the financial industry’s first standardised questionnaire for measuring corporate environmental risk; this sets a baseline for banks to gather and report consistent data on managing and mitigating environmental risk, helping to drive engagement on the net zero transition with clients.

Banks are recommended to apply the questionnaire to customers which they have a credit exposure of more than US$10 million, initially targeting high-risk sectors including agriculture, energy and industrials.

At the end of the day, the transition to net zero is a journey and the path we choose to take matters. As we balance the net-zero tightrope, no one company or industry can go it alone. Transition finance can be ambitioned by governments, facilitated by banks, and adopted by corporates large and small. If we are to limit global warming to 1.5°C as per the Paris Agreement, we need to move at pace and consistently make meaningful decisions, not just big commitments.