As Singapore pushes for bolder emissions commitments, unlocking innovative green financing solutions are more critical than ever for the country to mobilize capital for sustainable development.
By Dora Heng
As a small island city-state vulnerable to climate shocks, Singapore has proactively embraced the fight against climate change. In his speech during the 2020 Budget debate at the end of February, Coordinating Minister for National Security Teo Chee Hean articulated Singapore’s long-term low-emission development strategy (LEDS). He announced the goal of capping Singapore’s greenhouse emissions by 2030, halving emissions by 2050 and achieving net-zero emissions in the latter half of the century.
While Singapore only accounts for 0.11% of global carbon emissions, the country seeks to be a key player in promoting sustainable development in Asia.
Green finance has a pivotal role in closing the sustainable infrastructure investment gap within ASEAN
As per the Paris agreement, signatories are committed to “making finance flows consistent with a pathway towards low greenhouse gas emission and climate-resilient development”. This requires mobilizing significant investment towards low-carbon, energy-efficient projects.
Within the ASEAN context, the investment gap for sustainable infrastructure projects is estimated to be US$200 billion annually until 2030. Capital investment is critical for ASEAN to meet its aspiration of increasing the share of renewables in the energy mix from 10% in 2015 to 23% by 2025.
Innovative financial instruments designed to channel private capital into green projects are essential for complementing limited public budgets. The creation of green bonds would be a measured response to the growing demand for financial products that support low-carbon investment. Green bonds are fixed-income financial instruments specially designated to finance projects with environmental outcomes such as renewable energy projects or green buildings.
The market for green bonds has been growing at a rapid pace from $3.4 billion in 2012 to $167.3 billion in 2018, however, they still only represent a mere 2% of the total global bond market share. This indicates the more can be done to increase the supply of green bond products on the market.
Digital technologies and institutional coordination can address market failures around green investment
The challenge of reporting and monitoring environmental impacts to address investors’ transparency concerns has so far prevented the mainstream adoption of green bonds. To provide credible mechanisms of verifying “green” impacts, specialized research agencies serving as third-party assurance providers are required to certify and monitor green outcomes.
However, this external certification process comes at a high cost. This cost presents a prohibitive barrier for small and medium-sized enterprises looking to issue green bonds.
Digital technologies such as blockchain and the Internet of Things (IOT) offer innovative solutions to improve environmental impact reporting and ultimately lower the transaction cost of green bond issuance.
By incorporating basic and cheap sensors in infrastructure projects to measure metrics such as energy consumption and carbon emissions, digital technologies can automate the monitoring and reporting process. In addition, by pairing IOT sensing data with the immutability of a blockchain database, bond issuers can access a completely traceable and transparent real-time audit trail that records the environmental impact of their investment.
The Green Assets Wallet, an initiative launched by the Stockholm Green Digital Finance in partnership with the German government and Swedish bank SEB, is providing blockchain-enabled reporting for green investments. The wallet serves as a trusted platform for both issuers of green bonds and investors. By providing validation of green claims of investment, this technology serves as a streamlined, cost-effective reporting tool.
Supporting fintech innovation and fostering regional cooperation are two policy areas of focus
To deepen the green bond market and associated technology integration, the Monetary Authority of Singapore (MAS) will need to support fintech innovation and foster regional cooperation.
Globally, there have been successful case studies of central banks creating blockchain-powered green bonds. In 2019, the World Bank and the Commonwealth Bank of Australia (CBA) raised an AUD50 million (US$33 million) bond offering for sustainable development on the Etherum blockchain, offering automated audit reporting of sustainability metrics.
As a financial regulator, MAS treads a fine line between safeguarding the regulatory obligations of the financial system and encouraging experimentation with emerging technologies. The MAS Regulatory Sandbox offers a government-sanctioned space for innovation to pilot technology-enabled green bond exchanges while allowing regulators to test and update financial regulations to keep pace with technological development. The MAS needs to continue to support the pipeline of start-ups testing new blockchain solutions and provide the guardrails for scaling post-pilot.
Collaboration across industries and startup ecosystems remains key. The MAS needs to continue to play the role as an innovation partner, by hosting platforms like the Singapore Fintech Festival (SFF) to convene cross-industry collaboration and incubation. Green finance will be high on the agenda for the event in 2020, with fintech startups pitching new ideas during the SFF Hackcelerator around sustainability use cases.
To promote the adoption of green bond issuance, the also government needs to lead harmonization efforts for standardizing environmental reporting.
There are existing international standards, including the ASEAN Green Bond Standards arbitrated by the ASEAN Capital Market Forum. But building on these existing frameworks and deepening regional corporation will be necessary to recognize and uphold international environmental reporting standards and disclosures. The MAS and the International Financial Corporation (IFC) have a platform to enhance investor awareness and knowledge of sustainability bond guidelines within ASEAN.
The case for a greener financial system is compelling for Singapore and the ASEAN region to meet its carbon emissions goals. Promoting finance flows towards green investment requires removing barriers in the measurement and verification of green claims. Blockchain offers a technical mechanism to broker trust, but the government needs to facilitate greater cross-industry collaboration to incubate new ideas and foster closer regional regulatory harmonization to unlock the potential of green finance.