Fast and ambitious climate action is desperately needed around the globe. This has become a point of focus in Singapore as the government confirmed the country’s goal of reaching Net Zero by 2050. They also strengthened the country’s target by aiming to peak its emissions earlier and 'reduce emissions to about 60 million tonnes of CO2 equivalent in 2030.'
Setting a sufficiently ambitious climate target is important for the country and the wider region. As an international financial hub, many Singapore-based financial institutions serve the needs of Southeast Asia and beyond. As these financial institutions seek to align themselves with Singapore’s Net Zero target, this will in turn translate into tighter rules on the ground around what can be financed. But what constitutes as sufficiently ambitious climate action?
A snapshot of Singapore’s Net Zero financing landscape
Recent years have witnessed notable developments. For instance, Singapore banks DBS, OCBC and UOB have all signed the United Nations-convened, industry-led Net-Zero Banking Alliance (NZBA). Among the various requirements, signatories are to:
- Transition operational and financed greenhouse gas (GHG) emissions1 'from their lending and investment portfolios to align with pathways to Net Zero by 2050 or sooner.'
- Focus their first 2030 targets on priority sectors where banks will achieve the most significant impact. Further sector targets must be in place within 36 months.
However, banks are not the only ones setting climate targets. Insurance company Great Eastern committed to an operational Net Zero target by 2025 and reducing 20% of its listed equity portfolio’s carbon footprint by 2025. Its competitor, NTUC Income, aims to reach Net Zero by 2050 and, among other commitments, to divest from thermal coal mining and coal-fired power plants by 2035.
The Monetary Authority of Singapore (MAS) also signalled the importance of financing the Net Zero transition. MAS Chief Sustainability Officer Ms. Gillian Tan alluded to the central bank’s future focus on transition plans and how financial institutions can influence the sustainable development of the real economy.
Overcoming the obstacles to financing the Net Zero transition
These efforts by public and private sector players can help to set the foundations for transition pathways and large-scale structural transformations. However, the road to Net Zero in Southeast Asia must anticipate and overcome three critical challenges:
1. The voluntary nature of Net Zero commitments means that financial institutions are progressing at different pace
Net Zero commitments are voluntary, which means that financial institutions are left to set their own pace and ambition. With Southeast Asia’s economy still linked to many carbon-intensive industries, corporates in these sectors may seek to access credit from financial institutions which lack stringent sustainability policies or targets. Consequently, the ongoing financing of carbon-intensive projects may undermine the progress achieved by leading financial institutions with Net Zero commitments.
As an independent partner working across different sectors, our experience demonstrates that the journey towards a Net Zero commitment starts with empowering financial institutions with the knowledge and understanding of what such a commitment might mean for themselves. We have worked on many capacity building efforts regionally, including with the Alliance for Green Commercial Banks to conduct training sessions such as carbon footprinting for financial institutions.
2. Implementing Net Zero commitments depends on financial institutions’ internal capacity and technical expertise
A key part to implementing Net Zero commitments is decarbonising financial institutions’ investment and lending portfolios. For financial institutions looking to implement their Net Zero targets, strong internal capacity and technical expertise are critical to navigate the intricacies in the low carbon transition and strike a balance between engagement and just divestment. The fact that not all sectors currently have well-developed pathways to a low carbon transition adds further blockers.
More can be done to support financial institutions’ engagement with their borrowers and/ or investees on Net Zero-related topics. As a case in point, through a Nordic Private Equity Firm, we advised nine businesses from their portfolio on measuring their Scope 1 and 2 emissions as well as identify Scope 3 material GHG categories across their businesses. This in turn informs how the portfolio companies set their own climate targets.
3. Greenwashing concerns and the risks it present may hinder financial institutions from taking bolder actions on Net Zero
Due to widespread concerns over greenwashing and the risks it presents, financial institutions may take a conservative approach and delay making Net Zero commitments. Every financial institution’s investment and lending portfolio is different and the approach to decarbonisation—such as through engagement—would vary. Third-party verification of investee and borrowing companies and/or projects can make financial institutions’ disclosure more credible, creating confidence in financing the Net Zero transition.
Financial institutions could promote external verification and certification, such as the Carbon Trust’s Route to Net Zero Standard, to their portfolio companies to evidence the progress achieved as part of financing the Net Zero transition.
How we can help
As Singapore and Southeast Asia charts its path to a low carbon economy, it is high time for financial institutions to consider how they can finance the transition. Setting ambitious climate targets aligned to Net Zero is much needed in this region. Financial institutions which are early movers need support to achieve their Net Zero targets and work towards a level playing field, stronger engagement with portfolio companies and strengthen their disclosure on how companies are progressing in their climate journey.
The Carbon Trust have been pioneering decarbonisation for more than 20 years for businesses, governments and organisations worldwide. Our team of green finance experts in Singapore can help financial institutions finance this transition by gaining a clear insight into their carbon footprint and by supporting their portfolio companies to cut emissions in line with Net Zero.
If you would like to hear more about our green finance services, please get in touch.
[1] Financed GHG emissions refer to the emissions stemming from a financial institution’s investment/ financing portfolio.
