Green finance, a paradigm shift

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Sustainability Finance Institute Asia’s Eugene Wong (pic) is providing advisory services to various organisations that are keen to implement sustainable financing. Here are excerpts of an interview with StarBizWeek:

STARBIZWEEK: Some argue that the green finance movement is something that impacts the western or developed economies and there is no hurry to be concerned about these issues.

Wong: Sustainability is a global issue. Climate change is a global issue. They don’t recognise any borders nor are they trends. They are paradigm shifts. The impacts are very real. Just look at Asean. Four Asean countries were among the top 10 nations globally most impacted by climate-related disasters during the 1999 to 2018 period, according to the Global Climate Risk Index 2020.

The Asian Development Bank estimates that by 2100, the impact of climate change on Asean will be 11% being shaved off Asean’s gross domestic product.

Climate change will impact everything from water supply to rice production, to an increase in cardiovascular and respiratory diseases. It’s estimated that 185 million people will experience water stress by 2050.

The availability of capital and the cost of capital will be impacted for businesses globally, including in this part of the world, if they are not climate aligned.

On top of that, global action on climate change will transmit through the supply chain, affecting businesses in this part of the world.

How important is it for corporations to understand and implement sustainable practices within their organisations?

What happens if they only decide to pay lip service to these principles?

As I mentioned, this is a paradigm shift and there are many forces at work simultaneously.

Let’s look first at the direct business impact. It’s been reported that up to now, parties that have pledged net zero cover 67 regions, 1,049 cities, 5,235 companies, 1,039 educational institutions, 441 investors and 52 healthcare institutions.

Customers are starting to look at the carbon footprint of their suppliers very seriously.

Businesses that are not climate aligned face a real risk of being excluded from supply chains.

Because Asean nations are export driven, the supply chain and customers are also motivating a shift, with multinational companies (MNCs) willing to spend more on net-zero products and services.

A study by Standard Chartered revealed that MNCs will cut suppliers for failing to curb carbon emissions, with 78% of MNCs planning to remove suppliers that endanger their carbon transition plan by 2025.

Some 45% said they would pay a premium, of 7% on average, for a product or service from a net-zero supplier.

We have to watch the dislocations that transitions to green that are not sufficiently well planned can cause to the economy.

For example, small and medium enterprises are the backbone of Asean economies but transitioning will impact them in terms of competitiveness and affordability. Also, look at the recent energy disruptions in Europe.

Society has also grown more knowledgeable and enlightened. Customer boycotts and societal pressure, including on government policy, can affect businesses. The availability of capital will be affected. In a PwC survey of European institutional managers, it was discovered that 77% of those interviewed planned to stop purchasing non-Enverion SG products by 2022.

Climate related financial losses can happen as a result of asset impairment, damage or stranding.

Climate change is an economic, financial and social risk that financial institutions have to face.

Is there a worry of organisations indulging in greenwashing?

“Greenwashing” and “Sustain-ability-washing’ are among the biggest threats to the success of sustainable finance.

It can be described as representing that the proceeds of a loan or investment are used in a way that is more environmentally-friendly or sustainable than it actually is.

This can come about as parties take advantage of an absence of clear and credible definitions and targets, lack of verification and poor disclosure requirements.

We need to address this through credible and common definitions and with targets that are meaningful.

Disclosures need to be independently verified, consistent, comprehensive and accurate.

For the corporate world, what are the challenges and opportunities in light of the green finance developments?

The challenge is straightforward – how do you incorporate this global paradigm shift into your business model? Regulations, supply chain requirements, availability and cost of financing and stakeholder demands all come into play.

Banks and investors, nudged by regulators and stakeholders, will start reviewing the climate alignment of their borrowers and investees and augment the way they lend to them based on this.

So corporates should start their green journey now.

Corporates who are able to shift their paradigms faster and embrace the agenda will benefit from the demand by customers for environmentally aligned suppliers and for goods and services that are produced in an environmentally friendly manner, possibly even filling the gaps left by those who cannot keep up.

There are opportunities to develop environmentally friendly technologies and processes that will provide competitive advantages and new markets.

They can tap the green finance as well as the transition finance markets. But more importantly, by embracing a green agenda, they secure their own long term survival.