- Alan Lau, Partner, Head of Financial Services, Tax, KPMG in Singapore
- Leon Ong, Partner, Financial Services Advisory, KPMG in Singapore
- Patrick Atlee, Partner, Financial Services Advisory, KPMG in Singapore
- Sharad Somani, Partner, Head of Infrastructure Advisory, KPMG in Singapore
Singapore and its ASEAN neighbours are seeking to dramatically scale up investment in green infrastructure to achieve their ambitious climate commitments. The focus has shifted from setting sustainability targets to funding decarbonisation in real economy sectors, such as energy, transportation and real estate.
KPMG projects decarbonisation to be a key pillar of the economy, contributing up to 7 percent of Singapore’s Gross Domestic Product (GDP) by 2050. In ASEAN, new low-carbon activities could open up to US10 trillion in investment opportunities over the same period. That includes US$5 trillion in the renewable energy and power infrastructure sectors, US$ 4 trillion in energy efficiency and US$1 trillion in fossil fuel power plant retirement.
The green transition represents both a challenge and an opportunity. While the pace of energy transition from fossil fuels to low carbon and green solutions will depend on technological innovation and policy frameworks, an initiative to facilitate blended finance availability can go a long way in catalysing the transition. An orderly and just transition will be critical, and this requires the involvement of all relevant stakeholders – financiers, regulators, utility players, customers and employees.
This presents a great opportunity to Singapore to further leverage its position as a regional financial hub. The upcoming Singapore Budget 2023 should look to promote structuring, raising and deployment of public, private and foundation capital to fast-track green investment plans. No single source of financing will be able to meet the enormous investment of over a trillion dollars per year required to address the climate challenge.
Levers to spur green finance
Governments, financial institutions (FIs) and regulators need to step up collaboration to accelerate green finance, particularly as FIs grapple with the cost and operational complexities of incorporating Environmental, Social and Governance (ESG) considerations into business and risk management.
FIs are increasingly aware of the consequences of inaction on climate change – there is growing societal expectation that FIs should avoid financing projects that give rise to high carbon emissions, while future government regulations may also see restrictions imposed to curtail FIs’ ability to finance the highest emitters. Nonetheless, more can be done to drive home the message. This may include deeper engagement and education to help FIs appreciate that financing a company with a high carbon footprint will soon be no less acceptable than banking one that fails basic Know-Your-Customer (KYC) rules. This will create a stronger impetus for FIs to lend their influence to redirect more capital to sustainability-focused projects.
One key lever will be using a mix of public and private finance, especially for marginally bankable green projects. Blended finance structures such as multi-layered investment vehicles, social bonds and blended guarantees can help provide additional investor “patience” for longer payback periods than more traditional investments. Public funds and development guarantees can also help reduce risks to encourage private capital participation.
Green Bonds are also a key instrument, and the government has an important role to play in facilitating access to them. Sustainable bond issuers would welcome an extension of Singapore’s Sustainable Bond Grant Scheme beyond its current validity of May 31, 2023. This scheme offsets up to S$100,000 of additional expenses for external reviews of eligible green, social, sustainability and sustainability-linked bonds and promotes adoption of internationally accepted standards. Lowering its minimum issuance size from the current S$200 million would also bring in more issuers.
Singapore is also developing its ESG ecosystem to accelerate sustainable and green financing for the country, and as a regional and global hub. For instance, the government is supporting provision of ESG data platforms and services to help fill gaps in the data required to make funding and risk pricing decisions, while keeping the costs of providing green financing down. This is driving the development of sustainable financing in new customer segments, such as small- and medium-sized enterprises (which account for 48 percent of Singapore’s GDP), and financial services, such as sustainable supply chain financing, and sustainability linked short-term working capital lending.
The government could further encourage FIs into the green arena through a tax concession on interest income from green bonds or loans. For example, a five or ten percent concessionary corporate tax rate could be provided on interest income from loans used to fund the acquisition and ‘greening’ of older properties.
Exploring asset recycling and alternate funding options
ASEAN countries are realising the urgency of shifting from brownfield infrastructure such as fossil-fuel power plants to the likes of wind and solar energy. Singapore’s geographic position at the nexus of regional logistics, pipelines, and power grid infrastructure makes it a valuable base from which FIs can reach such markets. KPMG’s new ASEAN Decarbonisation Hub is offering expertise across the region for capacity building and financial structuring, bringing together government and private actors to accelerate decarbonisation efforts.
This can help to generate greater financial and environmental value by promoting a strategic and programmatic approach to monetising brownfield assets in capital markets. Establishing an Energy Transition Mechanism fund could further mobilise capital for asset recycling. For example, numerous aging fossil-fuel plants could be bundled together using grants and commercial financing in order to buydown their cost. This will help to bring in private sector innovation, investment and efficiencies to operate, or early retire aging infrastructure, freeing up public capital for other decarbonisation projects.
New advances in energy technology are paving the way for Southeast Asia’s shift from fossil fuels – Singapore should position itself to provide the innovative financing to unlock these opportunities at scale.