Taxonomy as an important tool to help steer transition in other activities

Besides coal, Southeast Asia is also home to other carbon-intensive economic activities in need of urgent decarbonisation. Yet financial institutions may be hesitant to devise any policies to finance these activities for the purpose of transition as they may be accused of greenwashing for instance, when their financing is viewed as prolonging the lifespan of these assets. The Singapore-Asia Taxonomy was the first taxonomy globally to pioneer the concept of a “transition” category. For financial institutions, this was an important step to define transition activities and reduced the risk of greenwashing. All their peers would have a ‘standardised’ approach to financing the transition, which gave them more confidence to formulate an official position or policy. 
 

Cross border relationships vital to increase sustainable capital flows

There are high hopes the Multi-Jurisdiction Common Ground Taxonomy (M-CGT) announced at COP29 will be a key initiative that financial institutions, corporates, investors and external reviewers can refer to in defining green activities, enabling more cross border financing in China, the EU and Singapore. While not legally binding, the M-CGT lowers the barriers to identifying more green projects in major economies. 
 

Singapore is well-placed to lead on financing the transition but expansion of the MCGT is needed to other Southeast Asian countries.

Many Singapore-based financial institutions are well-placed to influence change and direct more capital towards projects and companies in Southeast Asia where they already have a significant exposure and familiarity. An expansion of the MCGT to other Southeast Asian countries’ taxonomies will be needed to grow the volume of capital being channelled from Singapore to the green projects, assets and companies in the rest of the region. To scale up adoption of the MCGT, governments can take the lead in demonstrating how they apply the taxonomy in their investments. This will also increase the market confidence in the importance of taxonomies to finance green projects.

For instance, since 2013, China has been Singapore's largest trading partner, and Singapore has been China's largest foreign direct investor into businesses. These deep trade relationships could lead to opportunities for operationalising MCGT, setting an example for the rest of the market in terms of how Singapore is consciously walking the talk on sustainable financing and show the potential of seeking green projects overseas. 
 

Financial incentives must be fit for purpose

We need to go beyond government-led taxonomies to encourage greater market participation in the sustainable finance landscape. For example, we are seeing more financial institutions introducing sustainable finance products as a business opportunity across Southeast Asia.

Given the threshold of being considered sustainable is necessarily high, there is a limit to the number of sustainable projects in each sector. Where taxonomies typically guide how the proceeds are used, we need financial institutions to introduce green and sustainable financial products and for companies to demand sustainable financing. Taxonomies will not be sufficient and underutilised without the products and market demand for them.

Besides sustainable finance instruments such as green bonds and green loans where the proceeds are channelled exclusively to projects that have clear environmental benefits, sustainability linked financing is an important step to enable a wider range of corporates to participate in sustainable finance. To benefit, they would need to meet pre-defined sustainability performance targets to qualify for a financial incentive (e.g. favourable interest rates) while the proceeds can be used for general corporate purposes.

In practice, the details matter in ensuring that these sustainable financial products deliver genuinely impactful outcomes. For instance, are the financial incentives substantial enough to change the corporate’s sustainability behaviour? Or would these would-be issuers or borrowers eventually forego the financial benefit or penalty because investing in new technologies or undergoing business transformation is more costly?

Sustainable financial products are clearly not perfect but should be seen as an enabler for green and sustainable projects. 
 

Defining success

Another important question is how do we define or measure success in sustainable finance: in terms of the stringency of standards or the volume of capital?

From our experience of advising clients to develop their own sustainable financing frameworks, a fundamental question is how success should be defined in the context of sustainable financing.

On one hand, for banks, setting high sustainability eligibility criteria ensures that this additional source of capital is made available only to those borrowers with a strong sustainability track record. However, in an emerging market context, this would likely limit the number of eligible borrowers and in turn, limit the businesses that can benefit from new capital to enhance their sustainability efforts.

On the other hand, measuring success in terms of volume of capital unlocked – as reflected in the sustainable finance targets announced by some financial institutions – would involve making sustainable finance more accessible to different stakeholders. While this brings more revenues for the bank, there may also be a risk of accepting less stringent sustainability eligibility criteria to achieve the targeted volume of capital.

A balance between sustainability ambitions and commercial considerations must be struck for sustainable finance to be scaled up over time. 
 

Investors and governments need to step up after COP29

COP29 is not only a platform for governments, but also for investors to help address the climate crisis.

The 2024 Global Investor Statement to Governments on the Climate Crisis urges governments to adopt a whole of government approach to raise the ambition of their updated Nationally Determined Contributions (NDCs), which are due by February 2025. NDCs are crucial for countries to do their part to align with the Paris Agreement and limit global temperature rises to 1.5°C above pre-industrial levels. As the 650 investors representing USD 33 trillion in assets under management (AUM) in this letter say — effective policymaking must be embedded within these NDCs to unlock the private capital flows for the transition to a sustainable future.

However, impactful change needs to start with day-to-day investment decisions, and this is where Singapore-based investors can step up. As Singapore witnesses a growing range of sustainable finance offerings in the market, more dedicated training of investors is critical.

From our experience delivering a combination of technical assistance and capacity building for investors in the region, investors will benefit from being more discerning with their investments, and in turn, minimise their exposure to greenwashing risk. Equally important is for investors to prioritise their role and responsibility in the climate crisis, and knowledge of international best practices will be key for them to spur their investees to make the right decisions.