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Green Finance
Non-green financing becoming the outlier
Almost half of larger financings ESG-related, typically in green, transitional industries
Tom King 13 Mar 2024

The Asia-Pacific region is expected to maintain a 50% share of global primary energy demand and a 60% share of global carbon emissions (CO2) until 2050, according to recent research, and without robust policy action and investment this trend is unlikely to change.

In many jurisdictions across the region, where governments are working to alleviate poverty, decarbonization can play second fiddle to economic growth, and environmental, social and governance (ESG) regulations are not given precedence.

However, trends like transition finance for the decarbonization of hard-to-abate high-emitting industries and responsible infrastructure investment are increasing significantly across Asia-Pacific.

In a recent meeting with The Asset, Jean Woo managing partner of the Singapore office of global law firm Ashurst shared her perspectives and observations on the evolution of ESG issues, how they are being integrated into financial markets, and how she sees green finance, sustainable infrastructure investment and ESG regulation in the region developing in 2024 and beyond.

Woo is also a partner in the firm’s international finance department, specializing in international banking and finance transactions.

MAS, HKMA could follow EU

TA: Do you expect the Monetary Authority of Singapore (MAS), the Hong Kong Monetary Authority (HKMA) or the Securities and Futures Commission of Hong Kong to introduce more ESG regulations this year?

JW: Yes, 2024 will be a pivotal year for ESG regulations and considerations. There are three main changes coming onstream. 

First, Singapore has shown its willingness to be a front-runner in ESG reporting, and mandatory reporting will soon become a norm for businesses. The Singapore Exchange has introduced a phased approach to mandatory climate reporting based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). From 2023, all listed issuers have had to provide these TCFD disclosures on a “comply or explain” basis. The disclosures include Scope 1 and 2 emissions, along with other climate-related information. 

In particular, Singapore-listed issuers in the financial, agricultural, food and forest product, and energy industries are required to report such TCFD disclosures from 2024. The list will expand to include publicly traded companies in the materials, building and transportation industries from 2025. 

Singapore also recently extended these mandatory reporting requirements to non-listed companies. Reporting will begin in 2027 for companies with an annual revenue of at least S$1 billion (US$750.92 million), and 2030 for companies with an annual revenue of at least S$100 million. We expect that as things progress, regulators will enhance disclosure requirements for greater transparency.

Second, the price of the carbon tax in Singapore rose from S$5 per tonne of CO2 emissions in 2023 to S$25 per tonne in 2024, and will increase further to S$45 in 2026. By 2030, the carbon tax is expected to be between S$50 and S$80 per tonne of CO2 emissions.

Third, another regulatory change that will affect businesses in Singapore and Hong Kong exporting to the European Union is the bloc’s carbon border adjustment mechanism (CBAM). During the transitional period from 2023 to 2025, the CBAM will require EU importers of products like steel, cement and electricity to report carbon emissions embedded in their imports.

From 2026 onwards, the CBAM will require the EU importers to purchase CBAM certificates corresponding to the level of carbon emissions embedded in their imports of affected products. The EU has traditionally been at the forefront of climate action. Taking guidance and learning from the EU’s experience, there is a likelihood that the MAS and HKMA could adopt such regulations in future. 

As the world works toward net zero, ESG reporting requirements and regulatory changes should be taken as a given. These additional disclosures and requirements will come at a price. But at the end of the day, companies cannot afford to kick the can down the road as it will eventually be a lot costlier for businesses not to be green.

TA: Do you think the MAS will introduce the regulatory regime for ESG rating providers in Singapore soon? 

JW: Yes, but there are concerns that this may stymie the growth in a still nascent industry. At present, there is only a voluntary industry code of conduct for ESG rating and data product providers. 

The MAS is looking to develop a more onerous licensing and compliance regime to govern ESG service providers by regulating them in the same way as the providers of “capital markets services” under Singapore’s Securities and Future Act 2001 (SFA). 

If this comes into force, ESG providers will have to legally comply with the SFA and also all relevant subsidiary legislation, regulations and notices made thereunder. This will be a significant change for the industry as the provision of ESG services will be held to the same professional standards as other regulated activities like banking, insurance, fund management, capital markets and payment services. 

Compliance with these regulations is widely regarded to be onerous and costly, as such licensing can cost more than S$100,000 in application and legal fees. The application and ongoing maintenance of a licence may require an ESG provider to fulfil fitness and propriety tests of its key personnel, and provide and maintain established track records and evidence of a strong internal financial and risk management regime for its business.

Accelerating adoption of green financing

TA: Are you seeing any new innovative green financing solutions that could become mainstream offerings in the near future?

JW: Green financing has already become part of the mainstream offering, while non-green financing has become the outlier. 

In the 2010s when there were no regulations around ESG-related reporting and disclosures, the majority of international financings centred around coal, and palm and crude oil.

In 2011, the global commodity boom, for example, led to the partnership between Indonesia’s powerful Bakrie Group and financier Nat Rothschild in creating Bumi, Asia’s biggest exporter of thermal coal. This was the backdrop for many non-green financings, especially within the coal sector. Most, if not all, of the large banks were involved in this type of financing. 

The market has made a 180-degree change over the last decade. Nowadays, it is rare to attract large or international financing specifically in these sectors. Instead, we see that almost half of the larger-sized financings (those in excess of US$100 million) are ESG-related. These typically belong to green and transitional industries or businesses that have or are developing their ESG credentials in line with industry standards.  

We do expect the adoption of green financing to speed up over the next few years as sustainability comes increasingly to the fore.

Financings relating to MAS-backed transition credits are likely to be closely watched this year. Transition credits are a new class of carbon credits that can be generated when coal-fired power plants are retired early and replaced with cleaner energy sources. 

There are also ongoing discussions to provide financing using special purpose vehicles to facilitate the refinancing of existing debt. This may include the participation of stakeholders such as multilateral organizations like the Asian Development Bank to drive the initiative forward. 

TA: The awareness and inclusion of ‘biodiversity considerations’ into green and sustainable financing is increasing. Is it difficult to integrate or accommodate these considerations from a legal structuring standpoint? 

JW: It depends on the market. Biodiversity considerations are now in the spotlight due to the launch of the Taskforce on Nature-related Financial Disclosures (TNFD) – and not just in Singapore, but globally as well. Setting biodiversity key performance indicators (KPIs) will require an ability to monitor and operationalize measurement and reporting around a company’s material nature and biodiversity topics. 

In Singapore, we see that considerations aimed at curbing biodiversity loss and mitigating nature risks as challenging for companies. As land, ocean, agriculture or forest areas are in short supply, measuring impact on wildlife health, species diversity, habitat loss and degradation, for example, may be limited. That said, we do expect the adoption of TNFD disclosures to pick up pace in the coming years.

Conversely in Australia, we note that biodiversity considerations are more widely adopted by companies. This is because the Australian government has a more developed biodiversity conservation strategy and action plan. 

Australia has set national targets to address biodiversity priorities, including the requirement to protect and conserve 30% of Australia’s land and 30% of its oceans by 2030 and work towards zero new extinctions.

Sustainability performance targets

TA: What is the most important component in writing the legal structures for sustainability-linked loans – the selection of KPIs or the calibration of sustainability performance targets? Or is it more dependent on individual circumstances? 

JW: Both are equally important. For there to be real impact, KPIs need to be material to the company and sustainability performance targets must be ambitious. However, these are dependent on jurisdictional and industry considerations. 

In a large resource-rich jurisdiction like Australia, for example, biodiversity considerations are material, especially for leading resource companies like Rio Tinto. Rio Tinto has stated that its goal is to achieve a net positive impact on biodiversity and to ensure that biodiversity and its conservation ultimately benefit from the company’s presence in the region.

On the other hand, in Singapore, where the aviation industry is one of the key pillars of the economy and Changi Airport is constantly ranked as one of the busiest airports in Asia-Pacific, the aviation authority will require all departing flights to use sustainable aviation fuel from 2026 onwards.  

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