By Utkarsh Narain and Shyam Datye
“Accountants are going to save the world!”, claimed Peter Bakker, the Chairman of the World Business Council for Sustainable Development at the UN Conference on Sustainable Development in 2013. Green finance might just be their opportunity to do that.
Green finance
According to the United Nations Environment Programme, green finance is the routing of financial flows towards sustainable development practices, whether through microcredit, insurance, banking, or investment. There is an increasing interest towards green finance from the public, private, as well as non-profit sectors. Organisations are increasingly looking at aligning their efforts with the Sustainable Development Goals (SDGs).
Green bonds and loans grew by 50 percent year-on-year globally and touched US$ 255 billion in 2020. The European Union (EU) led green financing efforts globally with an issuance of US$ 106.7 billion, followed by the United States at US$ 50.6 billion, China at US$ 30.1 billion, and France at US$ 29.5 billion. While the market has grown significantly over the past few years, it is still only 3.7 percent of the global bond issuance.
Both green bonds and green loans are committed towards environmental and sustainability projects. The former are financed by investor markets while the latter are funded through banks. The Green Bond Principles (GBP) laid down by the International Capital Markets Association (ICMA) stipulate that the use of proceeds should be clearly identified, and if possible quantified. The process for project evaluation and selection should be clearly communicated and adhered to. The company should agree to inform investors about types of temporary investments and unallocated funds. It should also allow independent auditing of funds. The companies are also expected to report and prepare annual disclosures of the funds. Green bonds can be leveraged even by the companies that generally emit high amounts of greenhouse gases, provided that their project satisfies the above criteria.
While microfinance has increased access to financial resources to previously excluded populations across developing countries, a new stream of technical innovations which can sustainably improve the lives of millions have been becoming popular with microfinancing institutions. For example, in 2014, AFD Group launched its first green microfinance project in the energy sector in Cambodia along with 4 microfinance institutions and a technical operator. The microfinance institutions were responsible for designing credit products with appropriate maturity and rate and to work with Solar Home Systems (SHS) suppliers certified under the project. The SHS suppliers gained from the quality certification, which in turn encouraged widespread use of SHS amongst poor households.
Challenges
The green finance movement is still in its early stages and would require significant collaboration between governments, businesses, and citizens. Governments have their tasks cut out in devising clear policies and regulations, developing decentralised and effective institutional structures, instituting liberal tariff regimes, and providing incentives such as subsidies and grants.
Companies need to take greater initiatives towards promoting and introducing sustainable practices in their operations, nurture and further technological innovation, create awareness amongst the management and employees. Voluntary industry organisations need to document best practices, create self-regulatory frameworks and foster multi-stakeholder cooperation. A ranking of large companies (revenue greater than US$1 billion) with the most sustainable business practices was unveiled at the World Economic Forum (WEF) Annual Meeting in 2020. Such initiatives encourage businesses to adopt environmentally and socially sustainable practices. Generating greater awareness about environment-friendly lifestyles, and nudging and incentivising consumers to pay for sustainable options would increase the adoption of green finance.
The lack of universal standards for reporting sustainability and ESG impacts of businesses is a crucial challenge that needs to be addressed to mainstream green finance. Today, most companies follow formal, well-established guidelines for reporting more conventional financial metrics, but not those related to the impact of their operations on the environment and the society.
SIG Panel Discussion: The Future of Green Finance in Asia
Green finance is fast gaining popularity in Asia. The National University of Singapore (NUS) became the first higher educational institution in Asia to issue a green bond in May 2020.
To discuss the future of green finance in the Asian context, as well as learnings from developing the NUS Green Bond, SIG in partnership with Career Services of Lee Kuan Yew School of Public Policy (LKYSPP) organised an online panel discussion on 22 October, 2020. It featured the following industry experts in Singapore:
- Ms. Esther An, Chief Sustainability Officer, City Developments Limited (CDL)
- Ms. Mehrunisa Zafar, Vice President, Responsible Finance (Sustainability), Institutional Banking Group, DBS Bank
- Mr. Tan Kian Woo, Vice President (Finance), National University of Singapore
The session was moderated by Mr. James Crabtree, Associate Professor in Practice, LKYSPP.
The panel discussed the trends, challenges, and opportunities for green finance in Asia, Singapore’s role in mainstreaming it, the role of universities in promoting green finance, and the motivation behind NUS’s Green Bond. The session concluded with advice from the panelists regarding career opportunities in this space for young graduates.
Mr. Tan gave a firsthand account of NUS’s experience of issuing the S$300 million green bond and their journey so far. The bond is aimed at funding sustainable infrastructure projects at NUS in areas including renewable energy, green buildings and energy efficiency, wastewater management, and pollution prevention and control.
Ms. Zafar spoke about the importance of nudging towards sustainable lending practices by financial institutions like DBS. DBS launched the world’s first sustainable and transition finance framework and taxonomy to help financial institutions and businesses advance the sustainability agenda.
Ms. An spoke about the rising popularity of green finance in Asia as well as her experience in developing CDL’s pioneering green bond, the first by a Singapore firm. She also highlighted the skill gaps in green finance and opportunities for fresh graduates from multiple disciplines.
The panel also debated the impact of COVID-19 on green finance, particularly if the pandemic would expedite the shift towards green financing or hinder its large scale adoption given the global focus on speedy economic revival and increased government spending. The jury, however, is still out.
Watch the video recording of the event here.