Ravi Menon: What we need to do to make green finance work
Keynote speech by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at
the Financial Times Investing for Good Asia Digital Conference, Singapore, 8 September 2021.
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Good morning. Let me first thank the Financial Times for the opportunity to speak again at this
conference.
"The Earth has a deadline. Let's make it a lifeline".
These are the words on the Climate Clock in New York's Union Square. Instead of
measuring the time of day, this clock measures the time remaining to reduce greenhouse
gas emissions and mitigate the catastrophic effects of climate change.
We have less than ten years to cut emissions by nearly half and less than thirty years to
reach net zero, in order to keep global warming to within 1.5 degrees Celsius above
preindustrial levels.
Climate change is already happening; it is rapid, widepsread, and intensifying.
The recent report by the United Nations Intergovernmental Panel on Climate Change is
sobering.
Global warming has already reached 1.1 degrees Celsius above pre-industrial levels, the
warmest in 125,000 years.
With each year's delay in reducing global emissions, the task will get more difficult and
costly.
GREEN FINANCE AS A CATALYST FOR CHANGE
Green finance is a key enabler for the transition to a sustainable future.
The transition to a low carbon future will require fundamental changes across industries.
Significant financing and investment are needed to support these shifts.
According to the OECD, an estimated US$7 trillion of infrastructure investments are needed
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each year till 2030 to meet climate and development objectives .
The financial sector can be a catalyst for change through financing transition activities and
channelling capital to environmentally friendly projects and technologies.
The good news is that the volume of assets invested in sustainable projects is rising
rapidly.
Approximately one-fifth of all assets worldwide are now in funds that use some form of ESG
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criteria .
Multilateral banks are deploying more capital to support sustainability.
The ADB has committed US$80 billion from 2019-2030 to combat climate change.
Central banks are also putting their money where their mouth is:
MAS has committed US$1.8 billion of its reserves to climate-related investments.
These funds will be placed with five asset managers to manage new equity and fixed
income mandates focused on climate change and the environment.
The bad news is that green finance has not been able to reach the scale required.
According to the International Energy Agency, global investment in energy projects needs to
more than double from its current level by 2030 in order to meet net-zero emission goals by
2050.
According to a study by the Boston Consulting Group, the volume of climate financing will
have to grow over the next three decades by roughly five to eight times the current amounts
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raised .
THE CHALLENGE OF PUTTING TOGETHER A GREEN-FOCUSED BOND FUND
Why has it been difficult to scale up green finance?
Take for example an asset manager looking to establish a green-focused bond fund.
In constructing the portfolio, the asset manager has to check that the issuer of each of
the underlying bonds is able to:
ensure that the bond proceeds are clearly earmarked for projects which are green;
assess the climate-related risks and returns of these projects; and
measure and report the expected environmental impact of the projects.
The asset manager also has to assess each issuer's green credentials; whether it is:
exposed to material physical and transition risks arising from climate change;
has other operations that may lead to negative environmental impacts; and
has a holistic climate transition strategy with clearly defined targets and milestones
overseen by a strong governance framework.
The asset manager will also need to assess, monitor, and disclose the portfolio's
alignment with its sustainability objectives.
The most direct metric to compute and disclose is the fund's carbon footprint.
But investors also want to know the fund's future carbon trajectory or avoided emissions.
This is not easy given the lack of standardised disclosures by companies.
The issue is compounded by a lack of clear global standards to measure the savings from
avoided emissions.
Finally, estimates of future emissions pathways depend heavily on the assumptions made
for climate scenarios, sectoral developments, and human interaction effects.
THE THREE "D"S TO SOLVE: DATA, DEFINITION, DISCLOSURE
To make green finance work effectively, we need to solve the three "D"s - data,
definition, disclosure.
We must:
improve the quality, availability, and comparability of data;
develop compatible definitions or taxonomies for green and transition activities; and
implement a consistent set of global standards for disclosures and reporting.
Reliable and Comparable Data
To assess firms' exposure to physical and transition risks, and to properly price
sustainable loans or value investments, lenders and investors need reliable and
comparable data.
Some of the key climate-related data required include:
the borrower's or issuer's future emissions trajectories and whether they are on track
towards a sustainable, Paris-aligned pathway; and
comprehensive Scope 3 emissions, which helps us understand lifecycle emissions
along firms' value chains.
But the vast majority of firms do not provide such information, even those which have
set emission reduction targets.
The process of acquiring sustainability data remains manual, cumbersome, and costly.
There is also lack of transparency in the verification and reporting process for such data.
On the bright side, there are concerted efforts globally to solve the data problem.
The IMF, FSB, OECD and the NGFS, or Network for Greening the Financial System, are
actively working to address the data gaps in green finance.
The NGFS has taken a targeted approach by focussing on specific use cases and
associated metrics. It is also examining the concept of publicly available repositories as a
way of pointing users to existing climate-related data and helping them to access relevant
data sources.
The IMF has created a climate change indicators dashboard that brings together climate
related data needed for macroeconomic and financial policy analysis.
Technology is a potential game changer in addressing some of the data challenges.
It offers the prospect to capture data in a more connected and efficient way.
Some examples:
Application Programming Interfaces, or APIs, to connect directly to infrastructure
systems and retrieve relevant environmental and energy consumption data;
Internet of Things, or IoT, devices and sensors to measure carbon emissions and
pollution levels directly at source and in real time;
blockchain-based platforms to ensure provenance of ESG certifications; and
natural language processing to parse reports to distil and analyse relevant
sustainabilityrelated information.
MAS recently launched Project Greenprint which aims to harness technology and data to
support the green finance ecosystem. MAS is working with the financial industry to establish
data platforms to:
mobilise capital for green projects in selected sectors such as construction, agriculture, and
maritime;
facilitate the acquisition and certification of climate-relevant data from these projects;
monitor their commitments to emissions reductions; and
quantify the impact of the projects' abatement efforts.
Compatible Definitions or Taxonomies
To unlock sustainable finance, we need common definitions or taxonomies for the
activities that contribute to climate goals.
We are unlikely to have a single, global taxonomy.
But as more jurisdictions develop their own taxonomies, we must ensure they are
compatible or inter-operable.
Otherwise, cross-border green finance flows will be severely constrained.
In particular, there is an opportunity to develop clear definitions of what activities should
be considered transition activities.
This will support economies which are at different stages on the journey towards net zero.
Mobilising finance to transition activities will move the needle on climate action, especially in
Asia where many sectors are still emissions-intensive and there is a need to support
sustainable development.
In Singapore, the Green Finance Industry Taskforce convened by MAS is fleshing out its
proposed taxonomy for green and transition activities.
The taskforce has issued for consultation a proposed "traffic light" system to classify
sustainable activities as green, transition activities as yellow, and unsustainable activities as
red.
It is now working to develop more granular criteria, including metrics and thresholds, to help
operationalise the classification system.
Internationally, there are efforts towards achieving greater compatibility across
taxonomies.
MAS is working with its counterparts in the region to develop an ASEAN taxonomy for
sustainable finance that coordinates efforts across the banking, insurance and capital
markets sectors.
MAS is contributing to the work of the International Platform on Sustainable Finance to
develop a "common ground taxonomy" that will enhance transparency by highlighting
commonalities across different existing taxonomies.
The G20 Sustainable Finance Working Group, which is co-chaired by the US and China, is
looking into improving coordination on taxonomies across countries and markets.
For example, it encourages countries that are developing their own taxonomies to use
internationally recognised industry classification systems, to enhance interoperability.
Consistent Disclosures and Reporting
There is a pressing need to converge on a set of consistent climate-related reporting and
disclosure standards for companies.
Globally, there are more than 200 frameworks, standards, and other forms of guidance on
sustainability reporting and climate related disclosures.
This has resulted in selective reporting and inconsistent disclosures that are not
comparable.
For example, some companies report absolute reduction in greenhouse gas emissions,
while others report carbon intensity reduction metrics.
Some companies report reductions year-over-year, while others report reductions over
multiple years.
We are seeing promising signs of convergence on a global baseline sustainability
reporting standard.
The International Financial Reporting Standards (IFRS) Foundation is looking to establish an
International Sustainability Standards Board (ISSB) to develop this global standard. The G7
and G20 countries have welcomed the IFRS' programme of work.
The IFRS effort will build on the recommendations of the Task Force on Climate-related
Financial Disclosures (TCFD), which have gained wide acceptance internationally.
In Singapore, MAS and SGX are setting out roadmaps for mandatory climate-related
financial disclosures by financial institutions and listed entities respectively.
SGX has issued for consultation a proposed roadmap to introduce mandatory
climaterelated disclosures consistent with the TCFD recommendations for listed entities, starting
with sectors most exposed to climate-related risks.
MAS will consult the industry later this year on mandatory climate-related disclosures by
financial institutions. While all banks, insurers and asset managers are expected to make
climate-related disclosures from 2022, MAS' consultation will focus on how to transition
these expectations into mandatory requirements.
Another area where there is room for greater consistency and reliability of disclosures is
at the financial product level.
Two years ago, the Wall Street Journal reported that eight out of ten of the biggest
'sustainable' funds in the US are invested in oil companies.
We need to make sure that as green investments become more mainstream, there are
strong disclosure requirements in place.
MAS will set out early next year its regulatory expectations on the disclosure standards
that retail funds in Singapore with an ESG investment objective must meet.
With the enhanced disclosure in place, investors will be able to better understand the criteria
that an ESG fund uses to select its investments.
Investors will also obtain from a single offering document more information on the fund's
investment process, as well as the risks and limitations associated with the fund's ESG
strategy.
Investors will also receive periodic updates on whether the investment objective of an ESG
fund has been met.
Knowledge and Capacity Building
Beyond data, definitions, and disclosures, we need to build strong capabilities and
expertise to support green finance.
In Singapore, we are seeing more financial institutions and large corporates embedding
sustainability into their strategies and processes.
Specialised expertise is needed to:
quantify the environmental benefits and costs of new projects;
estimate how environmental costs could translate into future default risks; and
develop tools for reporting the sustainability metrics of various projects and business
lines.
To support this build-up of knowledge and skills, MAS has been working to anchor
centres of excellence for training and research on green finance with an Asian focus.
We have two such centres based here already - the Singapore Green Finance Centre and
the Sustainable Finance Institute Asia.
We will soon have a third centre of excellence.
The National University of Singapore will be establishing by the end of this year the
Sustainable and Green Finance Institute, or SGFIN.
SGFIN will help groom a pipeline of talent and leadership in sustainable and green finance
across the career spectrum.
It will help equip companies with the multi-disciplinary knowledge necessary to integrate
sustainability considerations into their business strategies and investment decisions, and
quantify their environmental and social performance.
A key research focus of SGFIN is to develop a sustainability and impact measurement
and assessment framework.
The framework will seek to determine the monetary value of companies' environmental and
social performance.
It aims to address the lack of consistent and standardised ESG data in Asia by utilising
modern statistical and advanced machine learning tools to capture environmental and social
data on Asian firms.
The three centres of excellence in green finance in Singapore will complement one
another.
The Sustainable Finance Institute Asia will support capability building in formulating and
implementing sound sustainable finance policies in Asia.
The Singapore Green Finance Centre will support applied research focused on catalysing
green finance solutions by the industry.
The new Sustainable and Green Finance Institute will bring together expertise across
multiple disciplines to identify how finance can advance sustainability in different economic
activities.
The growing depth and diversity of research in sustainable finance will provide ballast to
Singapore's growing status as a leading green finance hub.
CONCLUSION
The climate clock is ticking ...
The next few years will be critical in ensuring that the financial system is equipped to facilitate the
global transition necessary to achieve the climate objectives that 195 countries signed up to in
Paris in 2015.
Let us do our part - as regulators, standard setters, investors, asset managers, and financial
service providers - in greening the global financial system.