Mr Ravi Menon, Managing Director, MAS, spoke on the role that finance plays in supporting post COVID-19 recovery, and how Shanghai and Singapore can work together to harness the power of finance to promote a greener, more sustainable economy.
Published Date: 11 November 2019
"Green Finance for a Sustainable World" - Keynote Speech by Mr Ong Ye Kung, Minister for Education, Singapore and Board Member, Monetary Authority of Singapore, at SFF x SWITCH 2019 on 11 November 2019
1. Ladies and gentlemen, good morning. Welcome to the fourth edition of the Singapore FinTech Festival, and first edition of SFF x SWITCH.
2. We have come a long way since we began our FinTech journey in 2015. Singapore is widely recognised as one of the leading FinTech hubs in the world.
3. As shown by the opening video, we have remained true to our vision – to harness the power of technology and innovation to increase efficiency, manage risks better, create new opportunities, and improve people’s lives.
The Ultimate Global Commons Challenge
4. As mentioned by Ravi, this year we are making green finance a major theme of the FinTech Festival. Finance, technology and innovation will be critical for our transition to a sustainable world.
5. And Pavan Sukhdev from WWF just gave us an eloquent and compelling case for why this is so important. Singapore will do its part, as a responsible global citizen, to reduce carbon emissions and help make the world greener. As Prime Minister Lee Hsien Loong put it recently, “climate change is the ultimate global commons challenge”.
6. Singapore accounts for only 0.11% of carbon emissions in the world. By our actions alone, we cannot change the world. But through our actions, we hope we can inspire it, we can catalyse change.
7. We are developing our long-term low emission strategy. We are not building up from scratch, but from a strong foundation.
- We are one of few countries in the world, and the only in Asia to have introduced a broad-based carbon tax to put a price on emissions.
- We are also one of few countries in the world that limit our car population, and price their usage. Today, growth of car population is 0%.
- As a principle of planning, we build greenery into our cityscape. We have a natural reserve in the middle of the city. We systematically create wetlands and mangrove swamps to absorb flood water and cushion storm surges.
- Today, we have a linear system of ‘take, make and dispose’. Our Zero Waste Masterplan will transform Singapore to a Circular Economy, one that reuses resources in a continuous loop.
The Role of Green Finance
8. Our next ambition, is to leverage green finance, to make the world greener. Finance fuels the economy and business. It determines investment decisions. It drives action. We must make finance green, to drive climate action – mitigate and adapt to climate change.
9. As a leading international financial centre, Singapore will do the right thing to help reduce carbon emissions and promote sustainable development in Asia and globally.
10. What does it mean to make finance green? It means what the Paris Agreement says: “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”.
- That in turn means mobilising global capital for the green economy.
- Channel them to new investments in green businesses, technology, and infrastructure, reduce carbon emissions, while creating jobs and opportunities.
- It means a virtuous cycle that can bring about economic growth that is environmentally sustainable.
11. The last point is particularly important. Economic growth remains critical to the people of the world. It is inconceivable to tackle climate change and bring about a sustainable world, by telling the developing world to give up their dreams of economic development.
12. For many developing countries in Asia and other regions, they are still urbanising, populations are still aspiring to catch up from lower to middle-income living standards, and energy demand is still rising. The solution cannot be to curtail their growth and dampen their hopes.
13. That is why in 1992, the United Nations Framework Convention on Climate Change established the CBDR principle – Common But Differentiated Responsibilities, which forms the basis of the Paris Agreement.
14. We must dare to believe that we can bring about growth that is sustainable. It means making a quantum leap in improving energy efficiency, shifting the energy mix, including investing in renewable energy.
15. What is the extent of change needed? The International Energy Agency (IEA) developed a Sustainable Development Scenario up to 2040. Under this scenario, the world achieves universal energy access, yet reduces air pollution, and is on track to meet the goals of the Paris Agreement.
16. In this scenario, the use of fossil fuels falls by a quarter while hydro and other renewables increase fourfold. The ratio of fossil fuels vs hydro and renewables shifts from around 20:1 to 3:1 by 2040. This shift is accompanied by continuous improvements in energy efficiency
World Energy Outlook 2018, IEA (2018)..
17. It is not a pipe dream. With technological advances, and widespread deployment of technology and green finance, we can have a good shot at achieving it.
18. IEA estimated that full utilisation of currently available and economically viable, energy-efficient technologies in industry, buildings and transport, will reduce global emissions by 11% from today’s levels
Energy Efficiency 2018, Analysis and Outlook to 2040, IEA (2018).. The technologies already exist. We need to deploy them.
19. From 2008 to 2017, coal’s share in China energy supply fell from 70% to 64%, as renewables rose from about 3% to 6%
World Energy Outlook 2018, IEA (2018).. Renewables costs have fallen due to technology, and at the frontier, renewables are more economical than fossil fuels.
20. In fact, solar and wind are highly competitive in the US
Lazard’s Levelized Cost of Energy Analysis Version 12.0, Lazard (2018).. And it can get cheaper in regions like ASEAN. ASEAN has set an aspirational target to increase renewables from 10% in 2015 to 23% of energy mix by 2025 ASEAN Plan of Action for Energy Cooperation (APAEC) 2016-2025 (2015).. We are almost halfway there, at 15% today Southeast Asia Energy Outlook 2019, IEA (2019)..
21. In addition, we can use smarter grids, and battery storage systems to overcome the problem of intermittency of renewable energy.
22. These are significant changes, because Asia represents about half of global emissions and world population. If Asia shifts, I think the world shifts.
23. The shift in energy mix has to be determined but progressive, in tandem with technological advances, and not sudden, not disruptive. It is not realistic to replace fossil fuels with renewables overnight. But we have to make progressive and determined moves.
Singapore: A Leading Centre for Green Finance in Asia and Globally
24. There is a lot that we can do in green finance, to bring about the shift in the energy situation I just mentioned. Globally, finance is still well behind the curve.
25. Fossil fuel financing is still significant, totalling US$1.9 trillion over the three years following the Paris Agreement, with financing still rising each year
Banking on Climate Change, Fossil Fuel Finance Report Card, Rainforest Action Network (2019).. Surely, the trend should start to reverse given that the energy mix has already started shifting?
26. Green bonds have started to take off, but still make up only a sliver of total bond issuance. Last year, global green bond issuance was US$168 billion
Green Bonds: The State of the Market 2018, Climate Bonds Initiative (2019). – just 2.5% of total bond issuance that year Dealogic (2018)..
27. Singapore’s financial sector can play a decisive role in promoting sustainable development opportunities and powering the transition, especially in Asia.
28. We can spur investments in renewables technology, in grid infrastructure, in battery storage. We also need investments in green buildings, efficient cooling and industrial systems, to optimise energy consumption. In time, maybe even bring about investments in carbon sequestration.
29. With our experience in financing the region, and capabilities in technology, we can make a unique contribution. Our goal is to be a leading centre for Green Finance in Asia and globally. Today let me outline some of the concrete steps that Singapore is going to take. There are three:
- First, build financial system resilience to environmental risks.
- Second, develop green finance solutions and markets.
- Third, leverage innovation and technology.
Build Financial System Resilience to Environmental Risks
30. Let me start with building financial system resilience. Climate change poses two main risks to the financial system.
31. One, physical risks, arising from climate change itself. Damage to assets and property caused by floods and rising sea levels. This can result in large insurance claims, and lower the collateral value of bank loans.
32. Over the last 30 years, the annual average worldwide costs of natural disaster is US$140 billion. In the last decade, seven out of ten years exceeded this average. At a temperature rise of two degrees, US$1.7 trillion of global financial assets or about 2% of today’s global GDP are estimated to be at risk
‘Climate value at risk’ of global financial assets, Dietz, Bowen, Dixon and Gradwell (2016). .
33. Two, transition risks arising from policy changes, technological advances, or changes in consumer preferences. Old fossil fuel assets can become stranded, and as a result, will devalue loans and investments in the energy sector.
34. The amount of stranded assets across the energy, industry and building sectors from now to 2050, could be up to US$20 trillion globally
Perspectives for the Energy Transition, IEA and IRENA (2017)..
35. These potential losses are large, can be compounded by other risks such as deforestation, land contamination, water and air pollution, and threaten stability of the financial system.
36. Our financial institutions need to build up their resilience to climate change risks. This encompasses measuring, mitigating, and disclosing these risks.
37. First, measuring risks. This is about risk assessments and forward-looking stress tests.
- What would asset values be when sea levels rise and carbon prices increase? Banks, insurers, and asset managers will need to assess the impact of climate change on balance sheets and their loan and investment portfolios.
- The industry is beginning to move, but it has to move more quickly. Global regulators, including MAS are intensifying their supervisory focus in this area.
- MAS is working with our counterparts to enhance global practices in environmental risk management and disclosures. We do this through the Network for Greening the Financial System (NGFS), of which we are a founding member, and the Sustainable Insurance Forum.
38. Second, mitigating risks. This is about limiting and reducing exposures.
- The Association of Banks in Singapore (ABS) has issued guidelines on Responsible Financing practices. Our three local banks - DBS, OCBC, and UOB - have ceased financing new coal power plants, as they step up financing of renewable energy projects.
- Asset managers in Singapore have signed the UN Principles for Responsible Investment, and developed the Singapore Stewardship Principles for Responsible Investors.
- Financial institutions too, should make early strategic shifts in capital allocation from carbon-intensive to greener businesses, or risk being stuck with environmentally unfriendly “stranded assets”.
39. Third, disclosing risks. This is about providing sustainability-related disclosures to better inform investors.
- Within Asia, India, Hong Kong, and many exchanges in ASEAN
Sustainable Stock Exchanges Initiative (2019)., including the Singapore Exchange have implemented sustainability reporting on listed companies.
- It is a good start, but companies and financial institutions, should enhance the quality, granularity, and consistency of disclosures, for investors to make well-informed decisions.
40. To reinforce industry efforts and build financial system resilience, MAS will issue Environmental Risk Management (ENRM) guidelines across banking, insurance, and asset management sectors. These guidelines will set standards on governance, risk management, and disclosure.
- The guidelines will encourage the right-pricing of loans and investments, and thereby promote new opportunities for green investment.
- MAS will publish a consultation paper in Q1 2020.
Develop Green Finance Solutions and Markets
41. A second key thrust of our strategy is to develop green finance solutions and markets.
42. This will promote new economic opportunities in CleanTech and other growth areas, by financing the investments that these green sectors need to grow. Greening the financial system requires a range of instruments.
First, green bonds
43. MAS introduced a Green Bond Grant scheme two years ago. To-date, more than S$6 billion green bonds have been issued. The grant defrays the costs of external review against green bond standards.
44. We have expanded the scheme by reducing the minimum size, broadened its scope to include social and sustainability bonds, and renamed it the Sustainable Bond Grant Scheme. We welcome more issuers to make use of our schemes and issue more of such bonds here.
45. For green bond markets to reach scale, we need common green bond standards. This is to avoid fragmenting capital pools across borders, and tackle greenwashing. This is the malpractice of making projects look green when they are not green.
46. Globally, there remains important work to harmonise green bond standards for better comparability. That said, there are already standards that are fit for use by issuers.
47. An example is the ASEAN Green Bond Standards, which provides a regional framework for cross-border issuance. We had worked with our ASEAN partners to develop and update the ASEAN Standards to be in line with international green bond principles.
Next, green loans
48. To make finance green in Asia, we need to make green lending not a niche activity, but mainstream.
49. Banks are the main source of financing, particularly in Asia where capital markets are still developing. But green lending in this region is more nascent than green bonds. This is therefore an area with significant potential for growth.
50. We are beginning to see early shoots in green lending. In the real estate sector, many developers have secured green loans from banks, to develop new green buildings, install solar panels, and retrofit buildings with energy-efficient equipment.
51. In the broader market, sustainability-linked loans are gaining traction. Here, loan proceeds are not tied to specific green projects, and can be used for general corporate purposes so long as borrowers meet sustainability metrics.
52. Recently, Quadria Capital, a private equity fund in Singapore, became the world’s first to tap on sustainability-linked loans for private equity. We wish to see more of such developments.
53. MAS will develop incentives to encourage growth in green and sustainability-linked loans. In order to access lending, firms will need to incur costs to develop sustainability frameworks, and engage external reviewers. MAS will develop grant schemes to help defray these costs for businesses.
Third, risk transfer solutions
54. In insurance, we need to develop new risk transfer solutions that will help meet disaster protection needs, while creating alternative investment opportunities.
55. We established the Southeast Asia Disaster Risk Insurance Facility (SEADRIF), with support from Japan and World Bank. SEADRIF provides flood risk pooling and strengthens the region’s disaster resilience.
56. A good example of a risk transfer solution to promote green finance is insurance-linked securities (ILS), which enable the returns and risks to be distributed to investors via the capital markets.
57. To catalyse the growth of the ILS market in Singapore, MAS introduced an ILS Grant Scheme last year, to fund upfront issuance costs. Since then, we have seen the first catastrophe bond domiciled in Asia, and three catastrophe bonds issued.
58. ILS can be used to transfer other risks, not just catastrophe risk, and support the development of new climate risk insurance. MAS will study extending our ILS grant scheme beyond end-2020.
Fourth, green funds
59. MAS will launch a US$2 billion Green Investments Programme (GIP).
60. Under the Programme, MAS will place funds to public market investment strategies which have a strong green focus, with asset managers who are committed to deepening green finance activities and capabilities in Singapore.
61. This programme also supports MAS’ efforts to generate sustainable long-term returns on its investment portfolio. It complements our broader range of initiatives to accelerate the growth of Singapore’s green finance ecosystem.
62. As part of the Green Investments Programme, MAS will also allocate US$100 million to the Bank for International Settlements’ Green Bond Fund, in support of its global green finance initiatives.
Finally, green capabilities
63. As we develop solutions and markets, we need to build the requisite capabilities in green finance. We are collaborating with our universities, the Asia Sustainable Finance Initiative, and the International Finance Corporation to build up capabilities amongst financial industry professionals.
64. MAS will develop a scheme to support external reviewers, and rating agencies who assess and certify green financing instruments, and encourage them to expand their operations here.
65. MAS will also work towards anchoring Centres of Excellence in Singapore, to contribute to Asia-focused climate research, which can be applied in the financial sector.
66. The Centres will support the development of innovative green finance solutions, deepen our understanding of climate risks, and enhance climate risk management in Singapore. The Centres will also train and groom talent in green finance.
67. We have received keen interest from leading international research institutes and universities, to collaborate with our local universities to establish these Centres of Excellence.
68. Building such capabilities is extremely critical. This brings me to the third key thrust of our green finance strategy – leveraging on our strong FinTech ecosystem, and the capabilities and technologies it has to offer.
Leverage Innovation and Technology
69. Since we started our FinTech journey, we have built up a strong base of technological capabilities. We will build Green Finance on top of our technology stack.
70. We will harness the power of FinTech to spur green finance, by scaling up Reach, Innovation, and Data. We are already beginning to see interesting FinTech solutions for green finance.
71. First, reach.
- We will encourage the application of platform technologies for green finance to reach a wider pool of capital and market players.
- We can also use such technologies to connect supply chains. Bureau Vente Uganda develops digital platforms to monitor crops and financial transactions across supply chains, and to track data on crop yields and the sustainability of farming practices.
72. Second, innovation.
- We will encourage the development of smart algorithms, smart contracts and distributed ledgers, to increase speed, ease and transparency of transactions.
- Solstroem developed a Blockchain system for generation and transaction of carbon offsets. The system auto-generates carbon offsets, complete with time stamps and geo tags, using emissions data from smart meters. The records are secure, tamper-proof and transparent.
73. Third, data.
- We will promote the application of Big Data and advanced modelling to measure climate and financial risks, and develop new climate risk insurance products.
- For example, Asia Risk Transfer Solutions developed a cloud-based risk analytics software for designing and pricing agriculture and natural catastrophe risk insurance products.
74. This is just the tip of the iceberg. Many more ideas and applications will emerge. Every year, as part of the SFF FinTech Hackcelerator, we gather and publish problem statements around key themes, for FinTechs to develop solutions.
75. This year, there were vertical themes for banking and insurance, and the horizontal theme of financial inclusion. Next year, we will introduce Green Finance as a key horizontal theme for the 2020 FinTech Hackcelerator. It will be exciting to see new Green FinTech solutions at SFF 2020.
76. Let me conclude by going back to our larger purpose, and why this is important.
77. Finance, innovation and technology are a force for good, to overcome challenges and improve lives. Climate change is the ultimate challenge for humankind. It cannot be that the two objectives of being green and pursuing growth are irreconcilable. With imagination, innovation, technology, determination, we can reconcile them.
78. Part of this solution is to make finance green because finance mobilises the resources of the world. I have therefore laid out our goal for Singapore to be a leading centre for Green Finance, promoting sustainable development in Asia and globally.
79. Thank you, and have a great FinTech Festival.