Banks, corporates, and other actors in the financial system all have to work together to realise the goals of sustainable finance.
Sustainable finance is guided by a wide range of principles that are all designed to promote the transition to a low-carbon economy. The actual implementation of these ideas is reliant on various actors in the financial system working together - including banks, development organisations, and corporates. Each party has a different role to play.
Promoting sustainable development
The International Finance Corporation (IFC) for example is an early pioneer in the field of sustainable finance, having issued its first green bond in 2010, and it continues to be active in that area. So far, IFC has issued 109 green bonds worth USD7.5 billion in 12 currencies1.
“We are a development institution and developing the capital markets is essential to any country’s economic development,” said Priscilla Ng, Associate Financial Officer, Treasury Department, IFC. “We have helped establish local currency bond markets, not just by issuing debt in local currencies, but also by participating in our client’s green bonds.”
Ms. Ng highlighted IFC’s recent issuance of a triple-A rated peso-denominated green bond in the Philippines. Worth approximately USD90 million, the proceeds will be used to finance the capital expenditure programme of the Philippines’ largest producer of geothermal energy, which on its own accounts for around 9 per cent of the country’s total power generation2. The green bond label helped attract long-term investors, such as insurers, said Ms. Ng.
IFC is also working with regulators to unlock more private sector investment in sustainable projects. In June, the development institution signed a memorandum of understanding with the Monetary Authority of Singapore (MAS) to increase the issuance of green bonds3. The MOU will focus on two areas: increasing the awareness of green finance among financial professionals and encouraging the use of globally recognised standards for green bonds.
Reasons to go green
Among corporates, there is a growing opportunity to take advantage of growing investor interest in green bonds. HSBC’s latest Asian Bond Investor Survey found that 21.3 per cent of global investors currently hold green bonds in their portfolio, up 6.6 per cent on the previous survey4. Although this increased demand can translate into a pricing advantage for an issuer, there are deeper regions to undertake a sustainable deal.
“The reason you should go for green financing is not principally to generate a near term pricing benefit. The main reason is that it is part of your communication strategy as a user of capital – to say that you are well managed and sustainability is part of your business plan and that you are a winner – this will bring benefits to your cost of capital.” said Jonathan Drew, Managing Director, Infrastructure and Real Estate Group, Asia-Pacific, HSBC.
Mr. Drew also described the internal benefits that a company enjoys after issuing a green bond, which result from the preparation for the deal, as well as the ongoing reporting that has to take place after the transaction is completed. “A year after a green deal, the company’s finance people will often tell you that the process has helped them learn more about how their company operates, along with getting a better understanding for what institutional capital is looking for in an issuer,” he said.
Investing in renewables
For some companies, environmental concerns can be addressed through a commitment to a low-carbon future. Sembcorp Industries is a Singapore utilities, marine and development group that operates in five continents. It is actively investing in renewable projects as part of its role in developing a more sustainable world.
“As an integrated energy player with real capacity to help drive sustainability, Sembcorp is committed to growing our renewables energy business. We target to grow our total renewables generation capacity to around 4,000 megawatts by 2022,” said Cheng-Guan Tan, Head of Renewables and Environmental Business, Sembcorp Industries Limited. “We also recently acquired the UK’s largest flexible distributed energy generator. This gives us the expertise to address the issue of intermittency inherent in renewables, and enables us to offer a total turnkey solution.”
Mr. Tan pointed to Asia’s need to build large amounts of capacity in renewable energy, and that fits into Sembcorp’s strategy to expand in the region. The company has already built substantial renewable facilities in China and India, mostly in wind power. Building on its established presence in its home base of Singapore, it is also looking at opportunities in ASEAN, with a focus on three countries in particular – Vietnam, Myanmar and Indonesia.
Institutional funds are also interested in making direct investments into renewable energy, directing capital from Europe and North America into sustainability projects in emerging markets. OMERS is one of the world’s largest pension plans, managing the retirement funds for almost half a million employees of municipalities in the Canadian province of Ontario.
“Renewables have become an asset class that relies less on government subsidies into an asset class that really stands on its own from an economic perspective,” said Bruce Crane, Managing Director, OMERS Infrastructure, OMERS Asia Pte Limited. “In many countries renewables are now on parity or even cheaper than other sources of electricity.
OMERS has already invested around USD1.5 billion in wind and solar companies. In Asia, there are plenty of opportunities to profitably invest in the renewable space, said Mr. Crane. This is especially important, because investors cannot lose sight of the need for an investment to make business sense.