Further to our article on “Recent Developments in Sustainable Finance in Singapore – Green Bonds”, which outlines some key initiatives by the Singapore government to promote green finance in Singapore, we provide our observations on Singapore’s green finance scene and consider why green finance is an attractive proposition for corporates.
What is green finance?
To put it simply, green finance is any form of funding or structured finance that goes towards creating a better environment – whether natural or built environment. It includes the full spectrum of loans, debt mechanisms and investments from private equity investors, banks and financial institutions and governments.
Examples of prime candidates for green finance include projects in the following areas:
- Renewable energy
- Energy efficiency
- Pollution control
- Conservation of nature
- Waste management
- Sustainable farming or resourcing
- Creation of a circular economy
Why is green finance important for projects?
Almost all the projects involve some level of technology and innovation to drive change, and many of these projects involve not just capital investments but long-term technical maintenance.
Green finance as a whole creates a sound framework for bankable projects, which helps all stakeholders as it encourages the development of green projects in a more systematic way. It includes a full spectrum of loans, debt mechanisms and investments.
Professionals such as asset managers, banks, insurers have the skills and resources to assess the project. Other professionals like ESCOs (Energy Service Companies) could inspect and recommend energy conservation measures, and IPPs (Independent Power Producers) could provide renewable energy sources. The professional teams then fund and monitor the upgrades and continue to report on and disclose environmental risks.
For bonds and grants, governments are also taking action and creating a regulatory regime with an aim to create more transparency in the assessment of mitigation or conservation measures and to reduce borrowing costs.
These would tie in with a strong ecosystem to support corporates in going green, to help build sustainability capabilities, and ensure integrity in measuring, verifying and reporting progress.
What are examples of green finance in the public sector?
The Green Finance Action Plan
The Monetary Authority of Singapore (MAS), Singapore’s central bank and financial regulatory authority, announced in the 2019 Green Finance Action Plan strategies to support Singapore’s transition to a low-carbon future and its growth as a green finance hub.
- Strengthen financial sector resilience to environmental risks through MAS’s Guidelines on Environmental Risk Management which provides a framework to assess and monitor environmental risks.
- Harness technology to enable trusted and efficient sustainable finance flows by encouraging innovative solutions to help financial institutions.
- Develop markets and solutions for a sustainable economy by reducing borrowing costs for green and sustainable financing through the Green and Sustainable Bond and Loan Grant Scheme.
- Build knowledge and capabilities in sustainable finance by grooming talent in sustainability and green finance.
The Singapore Government has plans to develop Singapore into a green finance hub and announced in the Budget 2022 that the public sector will issue up to S$35 billion of green bonds by 2030.
In light of this, MAS introduced in June 2022 the Singapore Green Bond Framework, which sets out guidelines for public sector green bond issuances that are aligned with internationally recognised market principles and standards. This Framework comes ahead of the issuance of Singapore’s first green bond to fund infrastructure projects that meet the new framework criteria.
In line with Singapore’s sustainable development plans, the Government sector foray into green bonds signals the importance of green finance in Singapore and the anticipated growth of the country’s green finance market in the coming years. For more information on the Singapore Green Bond Framework, please see our other article here.
The risk of greenwashing
The proliferation of Environmental, Social and Governance (ESG) investing, has, however, bred a new risk – Greenwashing, or the channelling of the proceeds from green finance towards projects or activities having negligible or negative environmental benefits. Greenwashing cleverly capitalises on the clamour for green projects and is a complex issue which comes in a myriad of forms, such as hidden trade-offs, baseless or misleading claims and presentation of half-truths.
Asset managers, however, are not sitting on their hands and are tackling the issue via closer monitoring of portfolios, corporate engagement, and the adoption of enhanced risk management practices. Regulators are identifying emerging trends, risks and vulnerabilities that can have a high impact on investor protection and financial markets’ stability.
MAS’ stance on ESG compliance to counter greenwashing is that ESG statements should be supported by fact or data, and it must be accurate and complete. Efforts to standardise ESG related guidelines are being developed, with MAS consulting the financial sector in 2021 on mandatory climate-related disclosures against international aligned standards.
In the meantime, corporates that wish to avoid the perception of greenwashing should present ESG disclosures using a reputable, global reporting framework like GRI (Global Reporting Initiative) or SASB (Sustainability Accounting Standards Board). These frameworks require that the presentation of ESG information be standardised and comparable.
What can companies expect when they take up green financing?
In Singapore, banks typically have their own framework to assess “green projects”, which sets out eligibility and evaluation criteria, due diligence requirements, reporting principles and verification processes. A bank’s green financing framework is usually aligned with the United Nations Sustainable Development Goals (UNSDG), and for added legitimacy, some banks engage external third-party research firms to review their framework.
Banks often conduct in-depth due diligence on companies to screen and assess the business operations and verify that funding is disbursed to genuine green projects. This verification process is particularly important given the increasing risk of greenwashing (as mentioned above) as consumers become more environmentally conscious and demand for sustainable or “green” products rises.
Even after the borrower company has been screened, the lender bank will usually require the company to share with the bank its technical reports, feasibility studies or certifications, and these will be drafted as obligations of the borrower company in the finance documents. Banks may also require the borrower company to periodically disclose key “green” performance metrics so that the bank can continuously monitor the company’s business and its compliance with their green financing framework.
Borrower companies would, therefore, need to establish processes to evaluate and monitor environmental risks of their project or business and usage of the green financing to ensure they continue to comply with the bank’s green financing framework.
Why should companies take up green financing?
While compliance costs in taking up green financing are usually higher than regular financing, securing green financing presents the important intangible benefit of bolstering a company’s commitment to sustainability and climate issues.
Securing a “green loan” helps to raise a company’s corporate profile and position it to appeal to investors, stakeholders, shareholders and customers. Grants are also being offered by MAS to support Small and Medium Enterprises (SMEs) under the Green and Sustainability-Linked Loans Grant Scheme so that green financing can become more accessible to smaller or medium-sized corporations by defraying the costs of engaging external advisors needed to take up the green loan.
In line with the Government’s push towards sustainability and decarbonisation, many businesses are also working hard to showcase their ESG commitment and securing green financing is one way for a company to do so.
Bird & Bird is a global law practice with sector specialisation in energy and utilities. Our international energy & utilities team advises commercial enterprises and public sector entities on a wide range of legal issues including power purchase agreements, demand response programs, microgrids, energy storage, carbon mitigation, IP assets, hydrogen fuel cells, green loans and electricity futures. We provide legal support to our clients on M&A, fund-raising, energy regulation, project management, sustainability reporting, intellectual property, commercial contracts and dispute resolution. If you would like to discuss any matters concerning green financing for your company, please feel free to get in touch with any member of the Bird & Bird Singapore Energy & Utilities team.
This article is produced by our Singapore office, Bird & Bird ATMD LLP. It does not constitute as legal advice and is intended to provide general information only. Information in this article is accurate as of 21 June 2022. Please contact the authors if you have any specific queries.
For further information, please contact:
Sandra Seah, Partner, Bird & Bird