Corporate social responsibility (CSR) and environmental, social and governance (ESG) criteria have been creeping into financial services in recent years and we expect sustainable and green financing activity to pick up further in 2021. MAS predicts that US$200 billion per year in green investment is needed in ASEAN by 2030 and Singapore's financial sector can play a useful role in catalysing sustainable and green finance in the region. MAS is taking active steps to promote sustainable and green financing in Singapore's financial sector. It has implemented the Green Finance Action Plan, pursuant to which the GSLS and the SBGS have been launched, which aims to make Singapore a leading centre for green finance in Asia and globally.
Understanding green and sustainable finance
Green loans and bonds are a type of debt instrument made available exclusively to finance or re-finance, in whole or in part, new or existing eligible green projects. The Climate Bonds Initiative, in putting together the ASEAN Green Finance State of the Market 2019, for example, considered only bonds or loans where 95% or more of the proceeds were expected to go to climate change mitigation, adaptation or resilience projects.
Singapore is the largest ASEAN green finance market, with 2019 issuance volumes reaching US$4.4 billion – an almost four-fold increase on 2018. Interestingly, the growth of Singapore's green finance market has been largely due to green loans, which account for around 40% of 2019 volumes. While green bonds still represent most of the amount issued, nine of the 14 deals in 2019 were loans. Singapore is also the most diverse ASEAN country in terms of issue currency with issuers now denominated in nine different currencies such as USD, GBP, EUR, CNY and SGD.
Sustainability-linked loans and bonds are types of debt instrument which incentivise the borrower's achievement of ambitious, predetermined sustainability performance targets (SPTs). This is achieved by aligning the loan or bond terms to the borrower's performance against these SPTs – for example, borrowers are rewarded with a reduction in the loan interest rate if their SPTs are met. One recent sustainability-linked loan is Olam International's revolving credit facility, which includes an interest margin that is linked to meeting key performance sustainability indicators such as supporting farmers' and food systems' prosperity, developing thriving communities, and regenerating the living world. Thus, sustainable loans and bonds represent an opportunity for issuers to link their objectives of social and environmental improvement with the cost of their borrowing.
Unlike green loans, there is usually no restrictions on the use of proceeds for sustainability-linked loans, and they can be used for general corporate purposes. For example, the S$150 million sustainability-linked term loan facility of CapitaLand can be used for general corporate purposes, with the only conditions set on the borrower to trigger a lower interest rate being that it remains listed in certain sustainability indices.
MAS grant schemes
Green and Sustainability-Linked Loan Grant Scheme
The GSLS is, in our view, the lynchpin of the MAS Green Finance Action Plan. The first of its kind globally, the GSLS seeks to support corporates of all sizes to obtain green and sustainable financing by defraying the expenses of engaging independent service providers to validate the green and sustainability credentials of the loan. MAS will defray up to S$100,000 of these expenses per loan.
The GSLS also encourages banks to develop green and sustainability-linked loan frameworks to make such financing more accessible to small and medium-sized enterprises (SMEs). SMEs will not need to develop frameworks of their own prior to applying for sustainable financing to show that the proceeds will be deployed in accordance with internationally recognised green standards.
Given the relatively modest grant amount for borrowers, we think that the GSLS is unlikely to factor significantly in the decision whether or not to take up green and/or sustainable financing in the minds of large corporate borrowers. These borrowers tend to focus on business needs and requirements, loan pricing, CSG and ESG concerns; the GSLS is likely to be the cherry on top.
In implementing the GSLS, MAS, in our view, likely had the SME borrower more in mind. This makes sense if you consider that SMEs are the economic backbone of most, if not all, ASEAN countries. Shifting the region's economic development towards more sustainable product processes and consumption patterns is only possible with the active contribution of SMEs. This contribution, however, depends to a great extent on their access to finance for investments in cleaner production technologies. Therefore, facilitating SMEs' access to financial resources and specifically green and sustainable financing schemes becomes a real concern.
Sustainable Bond Grant Scheme
The SBGS is intended to encourage the issuance of green, social, sustainability and sustainability-linked bonds in Singapore and is open to first-time and repeat issuers. At the time of writing, MAS has indicated that the SBGS will be valid until 31 May 2023. MAS has laid down a set of qualifying criteria which potential qualifying issuers (and issuances) would have to meet (a non-exhaustive summary is set out below):
|Qualifying issuer||First time and repeat green, social and sustainability bond issuers. Issuers may apply for the grant multiple times.|
|Eligible expense||Costs incurred in respect of the independent external review or rating done based on any internationally-recognised green/social/sustainability bond principles or framework.|
|Per-issuance cap||Cap of S$100,000 or 100% of the eligible expense per qualifying issuance.|
Assuming these qualifying criteria are met, MAS will defray costs incurred in respect of the independent external review or rating done based on any internationally-recognised green/social/sustainability bond principles or framework. There is a cap of S$100,000 or 100% of the eligible expense per qualifying issuance.
Thus far, the two sectors which have produced frequent green bond issuers have been real estate and renewable energy. We expect this trend to continue in 2021, possibly with increased interest from issuers in the renewable energy sector. The Singapore Government has announced it is targeting 350 MWp of solar energy by 2020 and 2GWp by 2030, representing approximately 4% of Singapore's total electricity demand and a departure from a heavily reliance on natural gas. There is thus a strong potential for further issuers in this sector to issue green bonds to finance their operations to meet demand.
Singapore is emerging as a regional leader of green and sustainable lending. With new impetus from MAS in the form of the GSLS and the SBGS, we expect that the green and sustainable finance market will accelerate in 2021 and hopefully beyond.