Mon, Dec 07, 2020 – 5:50 AM
ENVIRONMENTAL, social, and governance (ESG) factors have become an important part of investment decisions. With six in 10 investors regarding ESG capabilities as increasingly important, financial institutions in South-east Asia may no longer hope to thrive without demonstrating impact.
These efforts have been supported by new regulations and guidelines from governments across South-east Asia. For example, the Monetary Authority of Singapore announced a range of new initiatives, including a US$2 billion Green Investment Programme and the recently announced Green and Sustainability-Linked Loan Grant Scheme to support green and sustainability-linked loans.
However, South-east Asia is still punching below its weight when compared to other regions, contributing only 3 per cent of the global total of issuance. But despite Covid-19, interest in sustainability has also never been higher. This provides financial institutions with an opportunity to accelerate the transition to a more sustainable economy and society, and in turn, build trust with their stakeholders.
Hurdles in green finance
It is inevitable that sustainability will become embedded in finance, as societal awareness increases and technology enablers improve. Yet – with a recent Accenture Strategy study revealing that only 21 per cent of CEOs believe that businesses were making a critical contribution to the global goal – more must be done to make the most of sustainable opportunities.
A pertinent issue is that the “greenness” of a financial instrument is not obvious, as many companies do not report ESG data in the same way they report financial data. In fact, 40 per cent of businesses fail to capture or report the financial impact of strong environmental performance.
This can be attributed to the lack of a standardised framework to measuring and communicating sustainable financial performance. While there are several companies assessing bonds, and offering ESG ratings, each company does so differently, which can lead to the ESG score of a company varying differently.
Additionally, while there has been demand from investors and support from governments and regulators for green projects, many corporations are still cautious. This can be attributed to the difficulty in identifying high-quality projects that are ESG-compliant and commercially viable, due to the complexity and high number of compliance-related requirements of such projects. Banks are therefore reluctant to offer green financing to small-size projects, as the effort required to issue funding for small-size projects is almost equivalent to larger ones.
Energising green finance
The current lack of disclosure of ESG data by many corporations has led to asymmetric information, with research revealing the combined financial cost of environmental impacts from telecommunications and consumer goods companies amounting to US$699 billion.
To ensure that businesses are delivering on their promises of sustainability, the use of digital technologies will be paramount. By leveraging technology including big data, machine learning, and artificial intelligence, financial institutions can work towards the convergence of green finance standards to reduce asymmetric information, enabling more accurate identification and assessment of risk.
For instance, a Sustainable Finance Marketplace can be built. This works similar to a mortgage aggregator site where companies can view offers across banks based on their sustainability and credit scores. Businesses of all industries and sizes can participate.
They will just have to create a Sustainable Profile of their company using verified and self-reported data that adheres to a recognised, international standard, such as the Task Force on Climate-Related Financial Disclosures. This data can be verified using blockchain technology across companies, service providers and the marketplace. As a result, SME and commercial clients would have easier access to loans, while banks will have access to trusted, authenticated information – a win-win situation for both.
A collective effort
While green finance has grown rapidly in Singapore and South-east Asia, there is still room for growth, and potential for businesses to benefit from it. However, tackling the key issues of sustainability and digital transformation through technological acceleration and innovation will require a collective effort from the fintech ecosystem.
Singapore’s success as the financial hub in the region has been the result of building capabilities in critical areas. As key stakeholders come together at this year’s Singapore FinTech Festival to strengthen business resilience and sustainability, businesses can work together to position themselves at the head of a sustainable future. There is fundamental pressure for banks to define who they are in the world of tomorrow, not the world of the past.
The writer is Market Unit Lead, Southeast Asia, at Accenture.