How to sustain the growing sector of sustainable finance

Sustainable finance is gaining momentum worldwide as more strive to do good. Ng Chun Jin, Director (Head of Renewables APAC) at ABN AMRO Bank N.V., Singapore, shed light on this emerging area of focus at a virtual masterclass titled Sustainable Finance: ESG and Renewables, A Practitioner View, organised by the SMU Lee Kong Chian School of Business (LKCSB).

The Monetary Authority of Singapore (MAS) defines sustainable finance as “the practice of integrating environmental, social and governance (ESG) criteria into financial services to bring about sustainable development outcomes, including mitigating and adapting to the adverse effects of climate change”, and it is working to help Singapore’s financial sector catalyse sustainable finance in the region.

As John Sequeira, LKCSB Associate Professor of Finance and Director for the Master of Science in Applied Finance (MAF) programme remarked in an interview with niche networking platform BusinessBecause: “Opportunities are opening up in green and sustainable finance, or impact investing. That is becoming increasingly attractive as the MAS encourages the financial sector and corporates to work together with their green efforts.”

Ng, who has 17 years of experience in the renewables sector, started the session by giving a brief history of the field. Public conversations about climate change started in the 1990s, but at that point, there was no consensus on what was causing the phenomenon.

Another factor at play was state subsidies for fossil fuels all over the world, which reduced fuel consumption costs for consumers and served an important social function. But subsidies also meant that “a lot of money is vested in this industry”, Ng noted, making the transition to cleaner fuel more challenging. These subsidies remain a significant factor today.

Milestone moments in the sustainability discourse include the 1997 Kyoto Protocol, which committed industrialised countries and economies in transition to limiting and reducing greenhouse gases emissions in accordance with agreed individual targets. 

That was the first step of a long journey that led to the 2015 Paris Agreement, which had the goal of keeping the increase in global average temperature to well below 2 °C above pre-industrial levels, and pursuing efforts to limit the increase to 1.5 °C.

The accord finally signalled the scientific consensus that the climate has warmed, and that human activities are causing this warming, Ng noted. It also signalled a consensus that individuals and nations should come together to slow down the pace of warming and reduce the risks and impact of climate change. The same year, the United Nations built on this momentum and announced 17 Sustainable Development Goals (SDGs), which served as a blueprint to achieving a more sustainable future.

Against this backdrop, the corporate approach to sustainable financing has also evolved. 10 to 15 years ago, investors and lenders might have done negative screening, which meant they chose not to engage with companies that were involved in what they considered to be socially or environmentally damaging business activities.

“The momentum in recent years has been more proactive,” Ng said. That means funders that participate in sustainable finance don’t just exclude unsuitable companies, but also pick companies dealing in sustainable businesses to invest in.

The emergence of the ESG criteria is one of the more recent instances of the business world (or certain segments of it at least) shifting from a focus on shareholders to a focus on stakeholders and being driven by values and thinking long-term impact rather than short-term gains.

Other similar trends in the recent past include the emergence of corporate social responsibility; Health, Safety and Environment (or HSE) guidelines for protecting employees, the public, and the environment from harm; the Equator Principles framework for assessing and managing environmental and social risk in projects; and the Poseidon Principles framework for assessing the climate alignment of ship finance portfolios.

Challenges ahead

How can one assess if a company is meeting ESG criteria? Ng pointed to the emergence of different ESG benchmark ratings, which help investors gauge whether a company is managing its environmental impact, social relationships, and governance practices responsibly.

Investment strategies include financing sustainable assets such as a wind energy project, financing issuers such as corporations or investment trusts that sell securities to fund sustainability-focused operations and giving sustainability-linked loans that come with key performance indicators set by the lender.

Indeed, 2019 was a record year for the issuance of green bonds, which raises money for climate and environmental projects. However, measuring the real impact of sustainable projects and practices remains a challenge. Greenwashing behaviour, whereby companies or institutions give inaccurate or misleading information about a project or brand’s environmentally friendly credentials, is a problem.

“Investors are asking more questions on measurement metrics and transparent output,” Ng noted. However, they could do more in elevating the emphasis on ESG performance, as opposed to conventional criteria such as financial risk and reward.

In short, the ESG framework and sustainable finance is still a work in progress, with one exciting driver of this sector being the growth of renewable fuels and technology. “Energy use has the most impact on carbon emissions,” Ng said. With new technologies such as electric vehicles and hydrogen fuel cells being developed, the energy industry is set for a huge wave of disruption and transformation, he believes.

One question to ask as the world enters this new era is this: does the ESG framework try to achieve too many things at the same time? “Are we biting off more than we can chew?” Ng asked. “Should we separate the ‘E’ from ‘ESG’ so that we can have a laser-like focus on E?”

In Asia in particular, climate change is a critical issue. The region needs to reduce its greenhouse gas emissions, yet it still has many communities that do not have access to electricity, which means that future demand for energy will still be going strong. At the same time, Asia is expected to bear the brunt of climate change phenomena, such as heat waves and typhoons. How can environmental sustainability be addressed in this context, without curtailing economic and social development?

For those who want to tailor their postgraduate studies towards a career in this highly complex and growing area, particularly in fields related to renewables, Ng advised a strong academic grounding in finance, as well as participation in relevant associations and clubs. “Bring other skills to the table”, Ng recommends. A non-finance background in subjects such as accounting, and engineering would also come in handy.