The Singapore Government’s move to issue green bonds for S$19 billion worth of infrastructure projects positions the country as a trusted hub for green finance, say PwC’s Fang Eu-Lin and Mark Rathbone.
Fuelling the nation’s ambitions to transition into a low-carbon economy and to be a leading green finance hub in Asia and beyond, the Government announced it will issue green bonds for S$19 billion worth of infrastructure projects at the Singapore Budget 2021.
These green bonds are significant given that ASEAN’s total green bond issuances from 2016 to 2019 was approximately only US$8.1 billion (S$10.8 billion), of which 55 per cent was contributed by Singapore.
This move positions Singapore yet more firmly at the centre of the green bond market regionally, even as it compliments Singapore’s already prominent role as a regional hub for infrastructure financing.
The year 2020 was a record for the global green bond market, with issuance of over US$269.5 billion, a shade up from 2019’s record of US$266.5 billion.
The Climate Bonds Initiative, which sets standards for green issuers, expects a tenth consecutive year of growth in 2021, with global issuance between US$400 billion to US$450 billion for the year.
WHY GREEN BONDS?
The aim of green bonds is to fund projects that have positive environmental benefit and they differ from conventional bonds particularly in relation to the use of the proceeds.
The proceeds need to be focused towards financing (or refinancing) green-related projects including those which support the United Nations’ Sustainable Development Goals.
To promote the integrity of the green bond market, issuers should comply with established frameworks and guidance (such as the International Capital Market Association’s Green Bond Principles (“GBP”) or Climate Bond Initiative) which emphasise on use of proceeds, process for project evaluation and selection, management of proceeds and reporting.
It provides guidance by way of a list or taxonomy of potential green projects too.
For Singapore, the Budget 2021 initiative can lead to attracting investors looking for green investments, and green bond issuers, and will deepen market liquidity for green bonds.
For governments, green bonds often offer a sizable pool of possible funding that could be accessed to fund much needed infrastructure projects and the greening of urban centres and assets within the country and regionally.
At a time when governments have spent significant sums on the response to COVID-19, green bonds offer an alternative source of patient funding.
From an investors’ point of view, green bonds can be a source to achieve sustainability targets of the investment portfolio. However, there are often no pricing benefits when compared to conventional project financing.
In addition, certification can increase the cost of financing a project through green bonds. Furthermore, revenue certainty becomes far more critical when considering green bonds against conventional infrastructure debt.
DEVIL IS IN THE DETAILS
Whilst it is a generally a good mechanism to finance green projects, the devil is in the details. There are challenges that need to be addressed in order to successfully issue green bonds including ensuring that it can stand up to scrutiny of it being indeed green and the reasonableness of the targets.
Challenges are usually more project-specific and largely around finding the suitable projects for investment. Finding investors to buy green bonds is often not an issue.
Structuring an infrastructure project to ensure it is investment grade can be challenging, particularly in the emerging markets across our region. Regulatory frameworks, effective risk allocation (which includes revenue risk, construction related risks, and political risk), transparent process and depth of capital markets are all fundamental issues that need to be addressed on any infrastructure project.
Considering these are often barriers to conventional funding bankability, one may question ASEAN market’s readiness to fund broader infrastructure through green bonds.
CONSIDERATIONS BEHIND ISSUING GREEN BONDS
Countries should focus on prioritising climate-focused projects while identifying current urban infrastructure assets that need investment to become cleaner – for example, transportation networks, aged buildings and climate-resilient infrastructure.
Funding sustainability focused decarbonisation programmes or net-zero plans around new green buildings or sustainable urban centres are more easily achievable.
One of the green projects identified to be financed as part of the Government’s announced green bonds plan is Tuas Nexus, Singapore’s first integrated waste and water treatment facility slated for completion in phases starting 2025.
Other examples include Transport for London and Hong Kong’s MTR Corporation who have issued green bonds to help finance new low-carbon transit projects in Greater London and Hong Kong, respectively.
To access and launch green bonds more successfully, governments can focus on addressing potential risk exposures on individual projects. More so, as COVID-19 has exposed certain sectors of the infrastructure market’s lack of resilience to a significant drop in real demand – for example, airports.
It is also important to continue to build transparency on the tracking and management of the funds until their full allocation to eligible assets and project funding. This would provide confidence in the environmental credentials of the government green bonds to international investors and the society, and help build trust.
The creation of green bond indices and Exchange Traded Funds (ETFs) is also crucial in facilitating capital flows into the green bond space. Excellence in capacity and capabilities within the market to drive the projects is critical in order for projects to be successful.
SINGAPORE POISED TO BE GREEN FINANCE HUB
Singapore has developed a reputation as a leading financial services hub with effective governance, regulation, access to financial expertise, including sustainable finance expertise, verifiers and professionals.
The Green Finance Action Plan developed by the Monetary Authority of Singapore is also a commitment inspiring testament to how serious Singapore wants to grow the green finance space, including the green bonds space.
The Singapore Government has been progressively ramping up its support in the sustainable finance space across the years including Green and Sustainable Bond Grant Scheme, the US$2 billion Green Investment Programme and the recently launched Environmental Risk Management Guidelines and consultation paper on the proposed taxonomy for Singapore-based financial institutions.
In the Budget it was also announced that businesses looking to go green in Singapore can tap on the Enterprise Sustainability Programme and continued support schemes for energy efficiency and sustainability.
Similar to how one buys into regular bonds, investors can choose to support a sustainability cause through direct investment into green bonds or green indices, or even green ETFs.
Despite some of the challenges noted in using green bonds as a form of finance, such building blocks position Singapore as a trusted hub for green finance, green business and green infrastructure.
There exists a strong demand for green bonds and Singapore’s Budget 2021 recognises not only the appetite, but also the need to focus on pathways toward becoming a global city of sustainability.
Fang Eu-Lin is Sustainability Leader at PwC Singapore. Mark Rathbone is Asia Pacific Capital Projects and Infrastructure Leader at PwC Singapore.