Battling the pandemic and guarding against the effects of climate change may seem like competing priorities. Governments and the private sector may “perceive being ‘green’ as an additional cost or a luxury” in these pressing times, says Chen Chen Lee, Senior Fellow at the Singapore Institute of International Affairs.
But this may be a false dichotomy. In fact, greening the financial system can help nations build a more resilient economy and recover from the pandemic, Lee believes.
“Green finance helps ensure capital is being channeled into projects that build up climate resilience and promote sustainable development in the long term,” Lee explains. GovInsider spoke with Lee to understand how greening the economy may make it more resilient in the face of Covid-19, and Singapore’s green finance journey so far.
Recovering from Covid
Covid-19 has landed Singapore’s economy in a bad state – potentially its worst since 1998, according to The Straits Times. Not only will a greener economy address long-term sustainability challenges, it can also build a more stable economy and protect it from the blow dealt by the pandemic.
First, green investments have proven to be more stable – a win in times of economic volatility. “Green bonds are currently outperforming their non-green counterparts in the market,” Lee points out.
Second, taking into account the environmental risks of a project will make the economy more resilient. Knowing these risks, financial regulators may make projects that are harmful to the environment more expensive for investors. This ensures that these risks are “properly identified and priced into business decisions”, she says.
Indeed, recovering from the economic impact of the pandemic and building climate resilience go hand in hand. “As we plan for recovery, we must make greater economic and environmental resilience the core of any stimulus package,” Lee urges.
The main players in green finance
How then can countries green their economy? Lee explains the roles that different stakeholders play.
Governments are one of the key drivers of change, as they have the power to write sustainability into the law. China, the world’s biggest producer of greenhouse gases, imposes additional taxes on organisations that release harmful pollutants into the environment. In 2016, France introduced a law that, for the first time, requires major investors to report on the environmental and social impacts of any new project.
Banks can nudge industries towards becoming more sustainable by setting the environmental standards that firms have to meet to qualify for a loan. Southeast Asia’s largest bank DBS runs an environmental and social risk assessment for every new project. “We carry out thorough due diligence for every deal we embark on to ensure we don’t finance activities that are likely to have a negative environmental or social impact,” says Yulanda Chung, the bank’s Head of Sustainability for Institutional Banking.
International organisations like the World Bank and the Asian Development Bank are also important in promoting green projects. “Their involvement in a transaction sends a signal that the transaction meets industry ‘green’ standards, giving investors greater confidence about its impact,” says Lee.
Singapore as a leader
Countries in Southeast Asia have made some effort to green their economies, but these efforts need to be aligned, Lee says.
For instance, three major Singaporean banks have stopped financing coal power plants, but many other banks in the region have not made the same commitment. “Given the interconnectedness of the region, coal companies may not be deterred but may simply seek financing from those banks with less stringent environmental and social policies,” she explains.
ASEAN governments, financial institutions and project developers need to work towards common standards for assessing environmental and social risks, Lee wrote in a recent SIIA report on sustainable infrastructure.
The country has taken notable steps to green its economy in recent years, notes Lee, and its standards can “serve as goalposts for other countries in the region”. One such step is the introduction of banking corporation HSBC Singapore’s SME green loan scheme, which makes it much faster for local businesses to obtain funds for green projects.
Some banks in the country are also offering discounted interest rates to companies that hit certain sustainability targets. Many different sectors, including real estate and agribusiness, are making more green-minded financial decisions, Lee adds.
How tech can grow green finance
Good policy and guidelines are essential in helping nations invest more sustainably, but tech can also help. For instance, AI can make real the seemingly-distant impacts of climate change with climate and sustainability modelling. These can help investors understand the true economic impact of a project on the future, Lee explains.
Blockchain, a highly secure way of storing data, can help companies know exactly how and where their products are sourced. Thailand is one of the countries experimenting with a peer-to-peer solar energy trading platform powered by blockchain. Buyers can then make informed decisions on where to get their energy from.
As the pandemic grapples for governments’ resources and attention, leaders cannot afford to neglect efforts towards sustainability. It will be important for Singapore and other nations alike to consider the environmental impact of each new project as they invest in our future.