As climate change becomes an ever-increasing concern around the world, governments, civil society, and even private companies are jumping into the fray in an attempt to tackle various aspects of the issue. In this vein, the growth of green finance as a means of addressing climate change is unsurprising, especially as increasing attention is being paid to it. In recent times, green finance has become a popular instrument through which entities in the rich world have been attempting to nudge businesses and industries towards a more environmentally responsible path. As one of the largest financial hubs in the world, Singapore is no exception to this trend and has been actively taking steps to encourage the growth of this sector.
What is green finance?
According to the United Nations Environment Programme (UNEP), green financing is meant to increase the “level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities”. In doing so, green finance offers investors a rate of return on their investments which are environmentally responsible. Hence, green finance guarantees positive environmental impacts while helping investors grow their assets.
Source: United Nations Environment Programme (UNEP)
Green finance as a new, novel category of investments – explicitly stipulating environmental responsibility as one of its underlying conditions – suggests that conventional finance and investments are damaging to the environment. This is indeed true to some extent. The most obvious example would be the trading of fossil fuels, such as oil, gas and coal, among others, or investments into fossil fuel companies. Such investments that encourage the expansion of the fossil fuel industry have been mainstays of investment portfolios for a long time – ranging from those of individuals to large educational institutions. Cognisance of the negative environmental impacts of such investments has galvanised the fossil fuel divestment movement in several educational institutions around the world which continue to invest their endowments in fossil fuels.
Source: 350.org, Hugh Warwick on flickr
In response to increasing pressure to divest from fossil fuels, many institutions have committed to and are increasing their commitments towards green finance instead. For example, HSBC, a global banking and financial services company, recently announced that it would commit to aligning its operations to the goals of the Paris Agreement and reach net zero carbon emissions by 2030. It also announced that it would “increasingly prioritise financing and investment that contributes to the low carbon transition and will apply a climate lens to financing decisions” – a step in the direction of shifting towards green finance in most of its operations.
Green finance in Singapore
With the advent of green finance around the world, so too has Singapore seen an increase in green financing activity – largely spurred by government initiatives – in the hopes of obtaining a slice of the pie and to burnish Singapore’s green credentials globally.
In 2019, the Monetary Authority of Singapore (MAS) announced the Green Finance Action Plan, aiming to grow Singapore into a regional and global centre for green finance. Part of the government’s rationale was that the financial sector plays an outsize role in “addressing the impact of environmental risk, and mobilising global capital for the green economy”. In supporting and directing capital towards more environmentally sustainable solutions, climate change and other environmental issues would likely be effectively addressed. To kickstart the Plan, MAS set up a S$2 billion Green Investment Programme to direct funds to asset managers committed to growing green capabilities in Singapore.
The shift into green finance is part of a larger strategy to position Singapore as a global green hub and to enhance Singapore’s international reputation for environmental sustainability, as noted in the recent Singapore Green Plan. The Plan seeks to leverage on green growth opportunities for Singapore to ensure that Singapore’s future growth trajectory is not only environmentally sustainable, but also financially sustainable.
The future of green finance
With mounting pressure for the gradual phase out of environmentally damaging investments, one should hope that green finance would, in the future, be the norm rather than a new or novel approach to investment. In order to keep within the IPCC’s guidelines of 1.5 degrees warming, green finance will increasingly become more important. Businesses should take note and duly transition into more environmentally sustainable operations to ensure their longevity and relevance.