On February 18, Singapore’s 2022 budget announcement included several reported environmental measures such as a significant increase in its carbon tax and the issuance of special “green bonds” to fund sustainable infrastructure. But behind the headlines, a quieter and more mainstream greening of the country’s corporate and financial sectors is underway.
At the beginning of 2022, the Monetary Authority of Singapore (MAS) began rolling out new disclosure standards that pay attention to how to classify and select retail ESG-focused investment funds and select their ESG investments. .
Such methods have been criticized in the past for providing opportunities that companies have exploited to enhance their ESG credentials without taking real action, the so -called greenwashing. The latest moves offer consistent ways to measure and compare ESG progress.
Ravi Menon
“With improved disclosure in place, investors will better understand the criteria an ESG fund uses to select its investments,” Ravi Menon, managing director of MAS, said in a public address last year. “Investors will also get from a document offering additional information on the fund’s investment process, as well as the risks and limitations associated with the fund’s ESG strategy.”
That’s great for Singapore if its regulators and financiers can deliver and transform the small island nation into a hub for ESG investment. In a global survey in 2021, more than half of respondents said they planned to fully or “to a large extent” to include ESG issues in their investment options by the end of the year. A reputation for good governance and transparency by ESG could put Singapore’s financial industry ahead of this new wave of sustainable investment. Yet the country faced significant challenges to accomplish that goal, which hampered other regional and global markets then.
More transparent, more objective, more standardized
The biggest of these challenges is achieving common and consistent standards on how to measure ESG performance. “Worldwide, there are more than 200 frameworks, standards, and other ways to guide sustainability reporting and climate-related disclosures,” Menon said in the same address last year. “This has resulted in selective reporting and inconsistent disclosure that is not comparable.”
Recent research suggests that ESG ratings between different providers correspond only about 30% of the time, compared to other financial indicators such as credit ratings, which are associated with about 99% of time. And many of those standards don’t lead to green or sustainable investment. Some research suggests that of funds that follow the UN Principles for Responsible Investment, one of the most well -known ESG frameworks, 1 in 5 is less than the median of all funds worldwide in terms of their actual ESG performance.
Dr. Hao Liang
“In Asian countries, we have a lot of so-called standards and frameworks, but all have just developed themselves — there’s no real standardization in the regions,” Drs. Hao Liang, an associate professor of finance at Singapore Management University, who co-authored the research and sits on the management committee of the Singapore Green Finance Center, a public-private partnership for ESG finance research that includes MAS as well as well as leading Singaporean and foreign banks.
“Our focus is to have something more transparent, more objective, and more standardized for the entire region,” he said. “We want to set standards from Singapore, not just for Singapore.”
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Singapore’s financial track record and influence on regional policy will help play the market -leading role in setting new standards, according to Liang. “If you want to be a sustainable financial center, you have to be a financial center first,” he said. “Singapore is in a good position on that matter, serving the wider region — both ASEAN and China. We have a quality of research that is on par with top schools around the world, and you see more and more large companies building of regional headquarters in Singapore. ”
And while Asia generally lags behind Europe and the US in establishing ESG standards, it also gives Singapore the opportunity to learn from the rest of the world and localize more effective strategies.
“As a hub for investment in Asia, one way for Singapore to enhance the quality of ESG reporting is through a taxonomy on sustainability,” said Frédéric Ducolombier, ESG director at Singapore-based research consultancy Scientific Beta.
Taxonomies work by identifying and classifying specific ESG-related activities and the minimum limits that companies must meet to qualify as sustainable or ESG compliant.
The EU and China already operate similar taxonomies, but none yet exist in ASEAN, giving Singapore the opportunity to, in Ducolombier’s words, “bring a bit of vitality” to the region. “Singapore has made great strides in pushing for local versions of these taxonomies,” Ducolombier said. “And, if adopted, we can count on the regulatory authorities to follow suit.”
The monetization of good
As new taxonomies and reporting standards evolve, whether led by Singapore or others, companies will need to adapt quickly. The first step is for top executives and managers to educate themselves on sustainable finance in a more systematic way by asking “who are the players, what is the market structure, what is the experience in more developed markets,” according to Liang. The second step is to invest in the skills needed to audit ESG performance according to ever-changing standards — something most companies and professionals, at least in Singapore, have not yet fully realized.
“Every company, because of regulatory push, requires someone to audit their ESG information,” Liang said. “But I keep telling my students at SMU: We know a lot about auditing financial information, but we don’t have enough people who know how to audit ESG information. There’s a big gap here. “We need talent, we need training, we need to invest big time to really understand how to report.”
Frédéric Ducolombier
Then, of course, there is the question of which reporting methods or standards will develop capabilities. Both Liang and Ducolombier point to the growing recognition that traditional ESG ratings do not have consistent and clear data under investigation.
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“If you’re comparing companies based on data that isn’t reliable, you can reward the wrong companies for performance,” Ducolombier said. “And you may also be taking the wrong risks, because of some maintenance -related accounting choices made by companies that are different.”
In the long run, business leaders are likely to better focus on the impact of investments, relying on reporting strategies that measure the impact of ESG investments and allow investors to continuously monitor the performance of the company over time. The impact of the investment is increasingly mounting on Singapore’s own messaging policy, and it offers an effective way to quantify the ROI of companies ’ESG efforts, which can raise tough questions.
“There’s a big section of the public, when you look at investor surveys, who are willing to pay extra for impact,” Ducolombier added. “But most outside strategies are not positioned this way. The risk is that the public becomes disillusioned with these offerings and ends up saying, this is another fake promise from the financial industry.”
If you want to go far, come along
On the face of it, leaders in both the private and public sectors need to increasingly work together — as seen in initiatives such as the Sustainable Stock Exchange group, led by British insurer Aviva along with the United Nations — to create more consistent and significant ESG strategies. Liang said Singapore was “doing well on this matter” based on partnerships such as the Green Finance Center, stressing that the momentum towards the new standards is likely to snowball when the big players are began to direct capital flows in their direction.
“It’s easier to do this if you’re in a small economy, where everyone is talking directly to each other,” Liang said. “We’re well-positioned to deliver the new leading standards for green finance in Asia.”
To get there, it will ultimately require regulators, business leaders, and the public to push for standardized and meaningful ESG standards that take significant impact on Asia’s biggest challenges.
“Our current share of investment in ESG is still small, but many of the world’s biggest so -called social problems abound in Asia,” Liang said. “Since Singapore has traditionally been the center to address Asian issues, I think here’s the right place for that hub.”
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