• Financing gap remains an issue, especially in APAC
• Regulatory measures have improved sustainability reporting
• FIs embrace climate change considerations
• Tech developments for green infrastructure in Singapore

The UN Climate Change Conference (COP26) marks a new milestone for decision-makers in their plans to tackle climate change through pragmatic approaches. The COP26, or Glasgow summit, gathers 25,000 decision-makers and aims to achieve a set of promises, specifically a cleaner, greener and restored planet.

The conference series was proposed in 1972 during a summit in Stockholm, Sweden, that focused on the theme of Human Environment. Some five decades later, the Glasgow summit materialised its focus on the mid-century net zero carbon vision.

The net zero carbon vision builds upon and intends to reinforce the objective to reduce global warming that was agreed upon in 2015 in Paris. Among several targets, the Paris agreement envisioned to keep global warming below 1.5 degrees Celsius by 2030.

Cherie Goh, chair of Singapore Transport Association, commented, “Rapid global industrial and economic developments are making the lives of humans easy and comfortable but also exacerbating climate and public health. Humanity is on the verge of facing extreme health and quality of life crisis.”

Natural events such as the wildfires in Australia and southern Europe, the flooding in other parts in Europe, and heat waves elsewhere have been linked to climate change and has consequently heightened the imperative of reaching the objective of the Paris agreement quickly. The International Monetary Fund (IMF) forecasts that such extreme natural events are likely to increase (see Figure 2).

Higher propensity for physical events necessitates climate change considerations

The dangers in inactions have been estimated to put companies’ assets and the world economy at risk, According to United Nations Environment Programme, an estimated 11-14% reduction of the global GDP by 2050 and about $1 trillion in assets (the estimated asset value of the 215 biggest companies in the world) are at risk.

Kimin Tanoto, CEO of Gunung Capital, commented, “Concerns of being left with carbon-heavy ‘stranded assets’ are serving as a wake-up call to legacy industries that must chart the difficult path to net zero.”

In view of the prologues before the Glasgow summit, numerous decision-makers have reiterated the urgency of collective actions to turn the tide on climate change and related risks such as negative social implications and both financial and non-financial risks for the financial sector and financial services companies.

In the invitation letter to COP26, Boris Johnson, prime minister of the UK and the host of the summit, has called for ambitions, courage and collaboration to mobilise the forces globally.

Financing gap remains an issue, especially in APAC

Climate change considerations imply both risk and opportunities for financial systems participants such as banks and insurance companies and other financial companies such as pension funds.

The World Bank issued the first ever green bonds in 2008, and today the green bond market is an estimated $1.3 trillion market, according to the Climate Bond Initiative. Green bonds are issued to finance environmental and climate projects including areas such as clean transportation, green buildings, renewable energy and sustainable water. 

Despite the significant growth of green-tagged bonds, statistics from the European Commission indicate that they account for just around 2% of the total bond volume issued globally. Currently, the EU leads the green bond markets, capturing 51% of the global issuance in 2020 from EU-based entities and 49% of global green bonds denominated in euros. In July 2021, the European Commission announced that about 2.6% of the total EU bond issuance can be considered green bonds issuance. Meanwhile, Morningstar reported in June 2021 that although fund flows are increasing, green bonds barely account for 1% of the global bank market.

Ng Yi Ming, CEO of Tribe, elaborated, “Hundreds of billions of dollars will be needed to finance green energy projects and much of this will need to come from private investors. We have already seen the global green bond market issue a record $269.5 billion in 2020, increasing from $266.5 billion in 2019, and it is estimated that more than $1 trillion cumulatively in green bonds have been issued to date.”

Similar observations can be seen in investment products. In its 2021 assessment of sustainable fund flows, Morningstar pointed to several indicators to highlight the growing size of sustainability funds. In 2020, assets under management reached nearly $1.7 trillion. In the last quarter of 2020, an additional $152.4 billion were channelled to sustainability funds.

This is a result of a financing gap. Benjamin Soh, managing director of Singapore-based fintech STACS, commented, “The financial sector needs to build up its sustainable financing capacity, which is currently hampered by a gap of $2.5 trillion in annual financing towards the United Nations Sustainable Development Goals (UN SDGs).”

Financial institutions have diversified their sustainability funds offerings into different product categories to include and exclude different concerns such as the environment and the climate. It is during the last few years that climate-related funds have been picking up speed.

Before COP26, major economies have pledged significant contributions to the cause. For example, the UK has put a ban on new petrol and diesel vehicles by 2030, implemented a green levy on gas bills, and provided electric vehicle purchase encouragements. Institutions including the World Bank and the European Bank for Reconstruction and Development also have plans to channel more lending towards climate finance.

Along with these developments, alliances among financial institutions (FIs) have gained traction, most recently the Glasgow Financial Alliance for Net Zero has attracted some 250 FIs. In Asia Pacific (APAC), alliances among FIs have been encouraged by agreements such as the New International Land-Sea Trade Corridor, which was set up to connect China and Singapore-based banks.

Tanoto pointed out, “Global capital markets and strategic partners are eager to raise funds and invest in ESG-focused opportunities, as well as carbon credits, to contribute towards a shift to sustainability.” ESG refers to the three central factors, i.e. environmental, social and corporate governance in measuring the sustainability and societal impact of an investment.

However, it remains to be seen whether the drive towards climate finance is a major opportunity for the financial services industry or a financing gap. Ng stated, “No region will need green investment more than Southeast Asia, yet a lack of robust, trusted ESG data is putting a break on green investments.”

Regulatory measures have improved sustainability reporting

The Paris agreement marks the start of a wave of regulatory measures. For the financial services industry, compliance with complicated regulatory measures and improved reporting are prerequisites to the push for the climate change considerations and the industry’s ability to fetch the potential opportunities. To add to the complexity, various jurisdictions have launched respective frameworks and rules to improve the climate reporting of companies.

In his closing remark to the Sibos 2021 conference, Mark Carney, the UN special envoy on climate action and finance, stated, “The six years old Climate Related Financial Disclosures has recently been ratified by both G7 and the G20 to support mandatory disclosures. These requirements are then planned to be mapped into regulations and have recently been adopted by the international body International Accounting Standards Board that has some 120 members states.”

In a parallel process, the EU has taken further steps to reinforce several reporting requirements. It has proposed the Corporate Sustainability Reporting Directive (CSRD), launched the Capital Requirements Regulation (CRR2), and the European Banking Authority has sent out its guidelines.

The regulatory trend has also been noted by the newly created resource pools at the regulators’ sites. Regulators in Europe and APAC have created new organisational functions led by high-level specialists. In June 2021, the European Central Bank (ECB) appointed Irene Heemskerk to head the Climate Change Centre that is mandated to coordinate ECB’s work on climate and to shape and steer the ECB’s climate agenda. In a similar move, the Monetary Authority of Singapore (MAS) appointed Darian McBain in September 2021 to head the newly launched Sustainability Group.

Magnus Schmauch, senior legal advisor at the Sustainable Finance Centre, Swedish Supervisory Authority, commented, “These high-level appointments mainly provide opportunities to channel the policy aspects of climate change actions at the strategic level of the organisation of the agency but they wouldn’t take over supervision of banks’ climate risk reporting.”

Currently, various frameworks, regulations and standards set requirements for disclosure whether it is for the purpose of the broader concerns captured by the ESG framework, biodiversity, net zero carbon mid-century visions or more. ECB requires an assessment of key risks and vulnerabilities faced by supervised banks every year and climate change has featured as a key risk driver for the last two years.

One central expectation is that disclosures should provide signals to decision-makers to address climate change considerations swiftly, for example, a drive to reduce the global emissions substantially by a certain date. For this purpose, decision-makers have agreed on hard measures and facts produced through various scientific endeavours and calculative practices common in various areas of supervision of the financial services industry.

Carney stated, “There are similarities between climate policies and banking monitoring policies. One is that disclosures can provide financial markets the basis to anticipate what companies are going to do. Then based on the provided information from predictable and credible institution, the market can direct investments towards the goals.”

FIs embrace climate change considerations

The climate change considerations have resulted in several changes for FIs. Firstly, the mission statements of banks have been adjusted to reflect the current push. For example, Thomas von Hohenhau, head of client solutions at VP Bank, explained that the bank’s current banking business philosophy “to always put the clients’ needs first” is complemented with “Investing for Change”.

Secondly, on the demand side of the business, FIs have designed their products to also include features that offer their clients climate-smart choices. The Vietnam Prosperity Joint-Stock Commercial Bank launched new product features in September 2021 that lets clients choose investment products with up to five different sustainability dimensions including environment and climate action, health and demographic change, renewable energies and a circular economy, equal opportunity, education and security, and sustainable infrastructure.

Felix Brill, VP Bank’s chief investment officer and chair of the sustainability board, stated, “There are different ways of taking sustainability aspects into account in a portfolio, and investors usually want to approach it in their own way.”

Regulations such as the corporate sustainability reporting stipulated in the EU are part of the reason for banks attending to clients’ sustainability preferences. Under the Directive 2014/95/EU, large companies in EU have to publish information related to environmental matters, social matters and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards (in terms of age, gender, educational and professional background).

FIs need to consider the clients’ sustainability preferences when marketing their products. Since these preferences are expected to impact corporations’ choices. Through this setup, corporations are supplied with the funds to consider ESG before making investment decisions and develop policies towards ESG.

Clemen Chiang, CEO of fintech Spiking, said, “Finance companies can put on display investment products and market them via the UN SDGs. Such marketing attempts are powered by advanced technologies that enable clients to consider their own personal sustainability preferences while making investment choices.”

Given that the access, processing and presentation of sustainability-related data can face various challenges, FIs are employing advanced technologies to mitigate these challenges.

Recently, VP Bank launched ORBIT, an open investment and structuring platform that provides access to the asset class of private market investments. Von Hohenhau commented, “We noticed the increasing relevance of private markets in today’s portfolio and observed how cumbersome accessing this asset class is for many investors. Hence, this triggered us to create systematic solutions through ORBIT.”

With advanced technologies, FIs are accessing sustainability savvy market segments and differentiating investment products to meet the needs stressed by the climate change considerations. One emerging technology is blockchain that is designed as a decentralised ledger and is capable of data collection, monitoring, steering and reporting operations that fit the purposes of the reporting obligations motivated by the climate change considerations.

FIs have discovered several benefits with blockchain. Ng stated, “Blockchain can help measure adaption-related activities such as carbon reductions initiatives in factories and agriculture. While blockchain as a technology can be leveraged for many uses, from making faster transactions to making supply chains more transparent, it will inevitably also be used to improve ESG reporting.”

Ng added, “A lack of transparency means that investors have few ways to evaluate how the investments are being spent, how green the projects are and what the evaluation criteria are. By tokenising projects through blockchain, we will be able to add traceability and provenance to green investments. It will also allow investors to diversify their portfolios and allow smaller investors to take part in further expanding the pool of green capital available.”

Angelica Lips da Cruz, CEO of Innorbis, a predictive impact and sustainable investments business intelligence accelerator, highlighted that blockchain is a revolutionary protocol that can manage multiple smart contracts, which enable transparency. However, she added, “It is still a long journey for any technology regarding how it is used, by whom, and for what purposes. There is still much work to do on the ‘G’ in ESG.”

Tech developments for green infrastructure in Singapore

As advanced technologies can provide tokenisation of environmental impact that comes with various benefits such as transparency, Singapore has a vested interest in creating a suitable environment for developing blockchain platforms and encouraging their use, for example, via Project Ubin, a collaborative project among MAS and global banks that started in 2016.

MAS also launched Project Greenprint in December 2020, which aims to promote a greener financial ecosystem through three pillars, i.e. mobilise capital, monitor commitment and measure impact. Soh highlighted, “Project Greenprint is an inspired example of the good a regulator can do by enabling firms to connect with FIs and investors to access a wider pool of green financing options and solutions.”

By supporting blockchain-related sandbox experiments, Singapore has reached a unique position. Ng commented, “Singapore is a regional (and arguably, global) leader when it comes to blockchain research and use. It has invested significant amounts into the technology including $12 million in 2020 to expand the blockchain ecosystem.”

Recently, Singapore extended support to Project e-VCC, which involves InvestaX, UBS, State Street, and CMS, as well as STACS, as the provider of an enhanced ethereum-permissioned blockchain for the project. The project was announced in mid-October 2021 and intends to showcase a new structural format for companies.

Meanwhile, blockchain carries the complexity of requirements that arise with the diversity of standards such as the ISO standards, Global Reporting Initiative standards and the International Capital Market Association frameworks. Soh commented, “A drive towards a common platform for ESG is necessary to support different standards. It is important that companies can plug and play the standard of choice depending on their use case.”

Ng stated, “Blockchain-enabled data platforms could standardise the way ESG is reported, provide more transparency and trust and thus encourage more investors and financial (and non-financial) institutions to invest in green infrastructure.”

The visionary intentions of the UN climate conference series such as the net zero carbon by 2050 are examples of mechanism that could potentially ease agreements between governments as they use basic calculations and numbers as points of references. Meanwhile, both the intentions and the articles of the agreements tend to pull the financial services industry in a space where long-term societal goals are expected to be tightly connected to the day-to-day decision-making of individuals. In this setup, FIs can use advanced technologies that are very different from the kind of soft means and emotionally stimulating construct that political leaders use to mobilise resources to deal with the climate change considerations.

The financial services industry has been accused of being late with incorporating ESG. The investments in blockchain capabilities works on a set of promises and could provide a solution for the industry. Ng commented, “The ability to accurately measure and record greenhouse gas emissions is vital if we are to transition to a low-carbon world; hence, any ESG strategy needs to be based on accurate data. By integrating blockchain technologies into traditional infrastructure and reporting mechanisms, we will be able to improve data provenance and accuracy.”

Diversity in sustainable data and reporting standards will prevail and investors and their intermediating FIs will continue to look for efficient risk management facilities. Meanwhile, entrepreneurial firms in the financial services industry may have found a way tackle the problem of how ESG data are obtained and processed. Soh proposed, “The finance gap stems from the absence of an efficient common data nexus between the financial industry and ESG projects. This leads to inefficient manual ESG finance operations and data fragmentation resulting in the inability for investors and consumers to verify the greenness of an investment.”