Courtesy : abs.org.sg

Green finance whitepaper

Climate change and addressing transition risks, i.e., the risks inherent in banks and Non-Bank Financial Institutions (NBFIs) portfolios as the world moves to a low carbon economy, impacts an obligor’s ability to meet its financial commitment. This presents both opportunities and challenges. Many opportunities exist in the form of financing renewables, investments towards a circular economy and electrification of mobility. Equally, there are challenges that will need to be addressed for example, increasing the pace of replacement of fossil fuel energy sources, addressing the risks of higher temperatures and increased flooding in low lying areas, impacting crop yields negatively. The need for banks and NBFIs to establish a robust framework for putting in place financing solutions both short and medium/long term, to help clients transition to a low carbon economy is an immediate imperative. While the market for long-term green solutions is well developed, this paper seeks to establish a Green and Sustainable Trade Finance and Working Capital Framework (“Framework”) for short-term trade, both funded and contingent and also working capital solutions for green and sustainable purposes, leveraging in part, the principles established by institutions like the Loan Market Association (LMA-Green Loan Principles) and the International Capital Market Association (ICMAFramework for Impact Reporting). Banks and NBFIs are also recommended to refer to the International Chamber of Commerce’s (ICC) Sustainable Trade Criteria: Customer Due-diligence Guidelines to better understand and assess their client’s environmental, social and governance risk factors. 1.2 Proposed financial solution Key drivers for green trade and working capital Sustainability is a key issue for businesses and will only increase in importance. Today, different businesses and industries are at different stages in their journey. Broadly speaking, traditional “brown” sectors need to transition to a low-carbon model while emerging “green” sectors seek more growth. Sustainable finance aims to facilitate and support environmentally sustainable economic activity. This can be delivered by looking into what we finance – by assessing the “greenness” of end use – and how we finance – by developing financial instruments and products. Currently, the prevalent green finance solutions are mostly long-term capital financing consisting of green bonds, club, and syndicated term loans. There is a need in terms of providing shorter term (< one year) solutions such as trade facilities and working capital. The proposed solution described in this paper aims to fill the need by providing green or sustainability-linked financing along the value chain. The financial solution will be based on providing short-term working capital needs to the supplier/seller (“Supplier/Seller”) and buyer (“Buyer”) along the value chain, including cross-border transactions, such as issuing a letter of credit for a buyer, financing receivables for a supplier, or providing a guarantee to support a bid. The benefits of increasing priority in sustainability agendas are clear, yet we recognise that the scaling of this agenda with green trade and working capital finance in Singapore will need to be supported by incentives such as: ▪ tax incentives for corporates participating in this program, for example higher preferential tax rates or longer tax holidays for Global Trader Programmes (GTP) and Regional Treasury Centre (RTC) participants; ▪ reducing cost of capital for Banks and NBFIs offering such financing for example, via statesponsored loan and trade credit insurance schemes, matching funds from impact funds, state-sponsored entities, and pension funds with lower costs of capital; Page 8 of 67 ▪ offsetting the costs of origination, for example, through an extension of the MAS Green and Sustainability-Linked Loan Grant Scheme (GSLS); and ▪ awarding carbon/green credits that can potentially be monetised on public exchanges. In addition, other indirect or non-financial measures to support the wider ecosystem are equally crucial. These include carbon taxes, a national carbon database, funding for infrastructure required to support traceability of products and processes, national or industry awards to provide awareness and recognition of achievers. Purpose of the Framework It is important that a Framework is established that incorporates guidance to help banks and NBFIs providing green or sustainable lending solutions establish the intent of the financing. This addresses any risks of “greenwashing”, i.e., providing financing for an ostensible green/sustainable requirement when this might not be the case. The working group proposes a range of solutions that takes into account the product type or the sustainability credentials of the supplier and buyer for each transaction, in order to determine the type of financing the transaction qualifies for, under the Framework. The key aims of the solution are: ▪ to support green companies or companies with recognised sustainable certifications grow faster; ▪ to enable non-green corporates to transition via a principles-based approach; ▪ to support various type of corporates improve their sustainability practices; and ▪ to establish a set of processes/guardrails to mitigate the risks of “greenwashing”. A fundamental pre-condition to fully realizing this approach is a robust and clear underlying set of recognised green products/certifications; technology as an enabler to provide traceability along the value chain and a set of recognised Environment, Social and Corporate Governance (ESG) ratings. The solution is principles-based, sector agnostic and has wide applicability for all companies requiring trade and working capital financing. While pure green activities such as producing low-carbon emission products is an obvious qualifier, the proposed solution also addresses how purchases from suppliers meeting certain sustainable certifications will qualify. In addition, it will also help companies obtain sustainability-linked trade financing. The working group envisages that the Framework will complement the rapidly growing green/sustainability-linked loan/bond market and equip banks and NBFIs to provide financing options to meet corporates’ short-term working capital needs while supporting their sustainability agendas as well as building resilience and financial viability of suppliers. Scale of the green trade and working capital market The total merchandise trade value in Singapore in 2019 was estimated at S$1,022 billion1 at current prices. The preliminary assessment of the addressable green categories is S$91.3 billion, the bulk of which is in the capital goods, recycled metals/rubber, organic chemicals, transport sectors . Potentially, this provides an estimated S$35 billion of sustainable financing along the value chain for financial services providers3 over the next 10 years. 1 Singapore Government Agency excludes domestic trade and goods that do not pass through customs. 2 Used HS codes to determine potential green/sustainable products. Overall ~9% of trade. 3 Based on The Sustainable Supply Chain Finance Opportunity, BSR, June 2018 – Global supply chain finance is ~US$2 trillion with estimated US$660 billion of sustainable SCF and US$6 billion revenue opportunities. Similar percentage applied to Singapore trade figure. Page 9 of 67 1.3 Implementation 1.3.1 Identifying key barriers to implementation and solutions The key barriers for implementing the solution can be grouped into two major categories, namely a well-defined eligibility and reporting framework as well as financial or non-financial incentives to promote adoption. The current lack of a clearly defined framework for determining eligibility and administration of the solution will need to be addressed. The working group recommends the establishment of a national framework to promote transparency, disclosure, and integrity of the borrowers. The Framework should be principles-based and aligned to the environmental objectives set out in the Singapore taxonomy 4 . Minimally, the Framework should include the following controls to assess if the environmental objectives and principles are met: determine the purpose on the use of funds; a process to monitor the use of proceeds; a process for banks and NBFIs to screen and assess the eligibility of suppliers to be in compliance with green sourcing requirements; and a process to review transactions or requirement for independent assessments to be conducted. Post disbursement of funds, there should be additional reporting outlined below: to report annually on amount of financing obtained and the use of funds; to report on key impact metrics; continuing representations and warranties; enhanced accounting, auditing, and regulatory reporting; and submission and renewal of certificates5 . The Framework will provide standardisation and adoption of criteria for scaling the solution as well as alignment with the environmental objectives and principles, set out in the Singapore taxonomy. A proposed Framework can be found in Appendix 2 – Green and Sustainable Trade Finance and Working Capital Industry Framework. In addition to the Framework, the development of incentives and discounts underpinning the financial solutions and funding support will be critical to promote widespread adoption. This can be achieved by maintaining and enhancing existing products and schemes, as well as introducing new ones. 1.3.2 Solutions to overcome barriers to implementation The working group proposes a phased approach to implementing the solution, with each phase corresponding to a more advanced stage of development of the Framework. At the same time, relevant incentives can be introduced to support development of the solution at each phase. Phase 1 The first phase (“Phase 1: Green Trade Finance and Working Capital”) will focus on introducing two elements to the Framework – the description of green activities and principles that will meet the environmental objectives set out in the Singapore taxonomy as well as guidelines on the adoption and reliance on sustainable certifications. The activities and principles will be supported with examples and are intended to be illustrative rather than exhaustive, as both, the definition of eligible goods and services and industry certifications will evolve over time, given the nascent nature of the market.