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GREEN FINANCING

OVERCOMING THE CHALLENGES IN GREEN FINANCING

STELLA LAU

ACCOUNTANTS PLAY CRUCIAL ROLES

Increasingly so, sustainability will become more widespread to play an influential role in every economic sector. With the financial industry having played a more significant role in accelerating the sustainability push, the Singapore government has also committed significant financing to support enterprises in advancing the sustainable development agenda.

In 2020, the Monetary Authority of Singapore (MAS) launched the Green and Sustainability-Linked Loan Grant Scheme, which helps companies gain access to green financing by funding costs involved in the validation of green and sustainability credentials of the loan. It also supports banks to develop green and sustainability-linked loan frameworks to enable small and medium-sized companies to access green financing.

Other than facilitating access to green financing, the government is promoting green knowledge and expertise development by supporting the innovation of green products and solutions in Singapore through the Research, Innovation and Enterprise 2025. The Ministry of Sustainability and the Environment is also managing a S$50-million SG Eco Fund to co-finance projects by organisations or individuals that advance environmental sustainability in Singapore and engage the community.

However, as enterprises ride the sustainability wave on the back of strong government support and an established financial industry, they must also be cognisant of challenges and risks. 

GREENWASHING AND DISCLOSURE

One of the biggest concerns is with green washing. It refers to the misleading portrayal of business practices, products or services to be green. This can arise from selective disclosure where a company reports only information related to positive environmental benefits, concealing information that is contrary. It can also involve decoupling which refers to “putting a positive spin on the communication of a firm’s corporate social actions”, despite the opposite being true. For example, companies can mislead consumers by overselling the sustainability aspect of a product in marketing messages. Companies can also choose to disclose only favourable information in their corporate sustainability reporting.

Sustainability disclosure standards are necessary to safeguard against greenwashing. This is also the mandate of the newly set up International Sustainability Standards Board. The International Financial Reporting Standards Foundation has also committed to unifying existing standards by the Climate Disclosure Standards Board and the Value Reporting Foundation – which is the merger of the International Integrated Reporting Council and Sustainability Accounting Standards Board.

In Singapore, MAS has set up the Green Finance Industry Taskforce taxonomy, which labels economic activities as green or otherwise. This can help financial institutions determine which products are green, which can help the mobilisation of capital for green investments.

Accountants can be the transparency gatekeepers by reporting on financial and non-financial information including sustainability aspects of the business. This helps the business cast a longer-term lens on growth, and better identify long-term risks to build resilience into business models. 

LACK OF STANDARD MEASUREMENTS AND INDEPENDENT ASSURANCE IN MEASURING AND REPORTING SUSTAINABILITY

According to a global survey conducted among more than 1,491 executives in 16 countries, business leaders reported difficulty in “authentically measuring and achieving sustainable impact”. They attributed this to a lack of measurement tools put in place to quantify sustainability efforts. This makes it hard to determine the impact of green activities and challenging to accurately report on it, which in turn risk greenwashing and compromise investor and stakeholder engagement.

In addition, there is a lack of regulation and standardisation around data collection and the metrics to be reported on. As such, not all companies report on the same data. Even if metrics are similar, they may be computed in different ways. This also means that benchmarking companies’ sustainability impact would be almost impossible.

It is also not compulsory for companies to get their sustainability reports and disclosures independently validated. In a 2020 report by National University of Singapore’s Centre for Governance and Sustainability on corporate sustainability reporting in ASEAN, only 15% of listed companies in ASEAN countries seek external assurance for their sustainability report. It also found that companies are unlikely to report unfavourable aspects even if these are important to raise. These lead to the problem of selective disclosure and accuracy of disclosure. If companies do not clearly know the sustainability metrics to be reported on, they are also unable to comply and are exposed to potential compliance risks down the line.

There are a few data providers that assess green debt instruments and companies, such as Sustainalytics and MSCI. However, ratings may differ from provider to provider for the same company or green bonds due to the lack of common standards and benchmarks in the assessment process. The assessment involves assessing the use of proceeds, project selection and evaluation process and reporting. This can be challenging for companies to manage investor confidence towards their green activities. It would also be confusing for investors to determine the attractiveness of their green investments. 

LACK OF GOOD-QUALITY DATA IN GREEN FINANCING

The lack of consistency in measurement and metrics reported on companies’ environmental profiles is one reason contributing to the lack of good-quality data in green financing. Additionally, it is resource-intensive for stakeholders to collect data and report on the asset throughout the lifecycle of the financing instrument. It is also costly for issuers to seek independent verification for the asset regularly. However, having access to such data helps issuers manage environmental risks and can greatly boost the uptake of green finance.

Technology can be harnessed to increase access to good-quality data. Digital solutions can facilitate the collection, structuring and cleaning of data so that it can be analysed, and further visualise results for reporting. Technological tools can also be applied to transform operations in adopting sustainable practices, help drive more widespread engagement across the organisation on green initiatives and used for measurement and reporting on green efforts.

To this end, MAS announced a partnership with industries to pilot four digital platforms to drive access to “high-quality, consistent and granular” sustainability data important for green financing. Called Project Greenprint, the objective of the initiative is to “promote a green finance ecosystem through helping to mobilise capital, monitor sustainability commitments, and measure impact”. MAS has been working closely with the financial industry and other sectors to identify digital solutions to mitigate data challenges including “interoperable data platforms” that can aggregate and integrate sustainability data across sectors and industry players. Better access to data will allow industries and enterprises to quantify risks and monitor sustainability commitments.

Accountants must continue to be the data gatekeepers for organisations, bringing the rigour of accounting to the creation of measurement tools that incorporate the “nuances and complexity of sustainability”, while leveraging digital solutions to optimise the process and generate insights for management’s day-to-day decision making. Backed by data, accountants can create credible business cases for sustainability and through establishing financial links to the adoption of sustainability practices as well as to the longer-term value of green efforts.

SKILL SETS IN DEMAND WITHIN THE GREEN FINANCE SECTOR

The role that accountants and finance professionals play will be significant to the success of the sustainability drive. However, there is still a lack of skilled sustainability professionals. MAS and the Institute of Banking and Finance (IBF) have identified four key areas that professionals will need to gain broad knowledge in. The four areas are climate change management; natural capital management; carbon markets and decarbonisation strategies management; and taxonomies application.

Importantly, there are also eight areas that accountancy and finance professionals should develop skill sets in. The eight areas are impact indicators, measurement and reporting; non-financial industry sustainability developments; sustainable insurance and re-insurance solutions and applications; sustainable investment management; sustainable lending instruments structuring; sustainability reporting; sustainability risk management; and sustainability stewardship development.

With the rapid growth of green finance permeating all sectors, it is critical for accountants and finance professionals to be upskilled to meet market and industry demands. For more details on the skill sets identified within each of the eight sustainability areas, please refer to IBF’s Sustainable Finance Technical Skills And Competencies. Accountancy and finance professionals can also refer to ISCA’s courses and webinars on sustainability.

This is the second article of a two-part series on sustainability. The first article, published in the May issue of this journal, discusses the impetus fuelling the growth of the green market, and the different types of sustainable financing instruments and projects.


Stella Lau is Manager, Insights & Publications Department, ISCA.