Various countries are taking the lead to meet the Sustainable Development Goals (SDGs) of the United Nations. The essential part of SDGs is working towards environmental sustainability. Indeed, every country and all politicians want to save the planet from environmental degradation. But are countries doing enough to achieve the goals set by multilateral organizations? Climate change and the harmful impact of greenhouse gases is a widely debated topic in the city-state of Singapore. How the burning of fossil fuels is adversely impacting the health of Singaporeans has made it to classroom lectures and board meetings. In the same context, green bonds hold immense promise. Let’s discuss how.
Things to know about Green Bonds
Are green bonds the same as sustainability bonds? No, not exactly. While the latter may mean any instrument for the financing of projects in the social and environmental sectors, green bonds are strictly confined to projects targeted at environmental sustainability. Another question is whether green bonds are like regular bonds in the capital market? This isn’t so. Bonds are mostly bonds, irrespective of whether they are financing a project for the installation of solar panels or for drilling of oil. The company raising money by issuing bonds seeks investors’ money, which is returned on a later date alongside interest for the period of holding the bond. Bonds are debt instruments, and when the word green is prefixed to them, it means that the issuer intends to spend the money so raised on environmental projects.
Now since the global community of investors, companies, and other stakeholders is becoming more and more cautious of the dangers posed by rising seas and increasing temperatures, green bonds are increasingly becoming the talk of the town. In Singapore, too, green bonds are finding their share of takers in the market. In essence, this is a way to push investors to invest their money in ecologically sustainable projects. Given a chance to finance a green or a non-green project, investors may find it ethically right to pick the former. Although the investor will be keen to perform due diligence ahead of buying green bonds, companies floating green bonds have a certain edge. Boards and management of these companies are seen as principled. Again, as in the case of regular bonds, the creditworthiness of the borrower is taken into consideration.
Having understood the basics of green bonds and why they are piquing the interest of all, let us discuss this more in detail. Understanding there pros and cons is equally essential. In the city-state, how many debt-seekers have already floated green bonds and how many are looking forward to doing so in the near-term will be discussed later in this article. Should investors in Singapore be outright positive about this debt instrument, or should they be a little watchful before investing? All these queries are legitimate and seek answers.
The Pros of Green Bonds
The most visible benefit of Green Bonds is their power to do environmental good. Now companies and other issuers like statutory boards have an obligation when they raise money through this source. Earlier, companies could invest their regular bond proceeds in virtually any which way they wanted as long as they did not divert away from the project. With Green Bonds in the picture now, any money so raised will have to be strictly used to develop environmental projects. People reeling under erratic weather conditions and increasingly long heat-wave spells can feel relaxed. Environmental projects can be in the transport sector, for example, production of battery-powered or fuel-cell-powered vehicles or such other related areas like sustainable housing.
Secondly, bond issuers will find it comparatively more straightforward to find backers. The global economy is facing a downturn, and Singapore hasn’t remained unaffected. The slump in GDP growth of the Singaporean economy is a cause of worry. At such times, investors shy away from investing in the capital market. Instead, they look for investments in safe assets, such as gold and other commodities. Green Bonds can alter this sentiment. Investors are well-aware of the need for environmentally-sustainable projects. Prioritizing clean energy from renewable sources over coal-based power projects and the development of housing projects that can have the least impact on climate are welcomed by investors. Add to this the element of commercial viability. For example, electric vehicles are an emerging market segment and that they are a formidable challenge to fossil fuel-burning fleet is known to investors. Green bonds issued in any of these projects will attract the interest of investors.
Thirdly, once the market for Green Bonds stabilizes and comes on par with regular bonds, issuers will be more than interested in being a part of this. It will act as a catalyst and motivating force for companies to pick projects that can add to environmental health. And since there will be checks and balances in place to regularly monitor how the investors’ money is being utilized against stated goals, chances of any diversions will be very thin. It shall pave the way for another industrial revolution, and this time it will not be leading to the generation of harmful greenhouse gases. By contrast, green bonds will shift the focus towards the betterment of climatic conditions.
However, green bonds have its own set of issues and challenges like clarity in mandatory guidelines, low returns on investment, lack of large projects to fund, cash flows, etc.
What’s in it for Singaporean issuers?
The city-state is dedicated towards achieving SDGs reflects in various schemes introduced by the government. A few of these schemes directly target the green bond segment.
First, it is the Green Bond Grant Scheme introduced by the Monetary Authority of Singapore (MAS). The scheme aims at developing a green bond market in the city-state and making this asset class a priority for all stakeholders. The scheme compensates the issuer concerning expenses incurred on getting an external review for issuance of green bonds. It is known that issuing green bonds can come at additional costs as compared to regular bonds. It is so because the issuer has to secure an independent assessment that evaluates processes employed while selecting the project and how the proceeds will be used. The evaluation is done in accordance with international standards, and hence, the reviewer charges a considerable amount for such services. Under the scheme, all costs incurred on obtaining such assessment are reimbursable, provided that the maximum reimbursement will be capped at S$100,000.
This scheme, available at least till 31 May 2020 unless extended further by the MAS, can be availed by domestic as well as international green bond issuers. The exception is that sovereign issuers cannot apply for the advantages under the scheme. Further, there are some conditions concerning bond tenor, principal amount of issue, and lead manager profile that are to be taken care.
Second, MAS has another scheme that partly addresses the green bond market. This scheme, Sustainable Bond Grant Scheme, recognizes not only green projects for grants but also social projects such as poverty alleviation. Although the scheme is by and large similar to the Green Bond Grant Scheme and recognizes the need to reimburse issuers the cost incurred on getting independent assessment done by external reviewers, it is available till 31 May 2023. Also, the eligibility criterion under this scheme is not the same as the Green Bond Scheme. For example, the minimum tenor of bonds has been reduced to 1 year under this scheme as against 3 years in Green Bond Scheme. Bonds under both the schemes are to be issued in Singapore and mandatorily listed on the Singaporean stock exchange.
Progress of Green Bonds in Singapore
Green bonds space is building upon the initial momentum received from issuers, including City Development Limited (CDL) and DBS Bank. While CDL issued green bonds to finance climate-resilient projects, DBS bonds cover renewable energy and adaption to climate change. Manulife, a life insurer, issued their first green bonds in Singapore in 2017. It is said that Manulife’s issuing of green bonds will help mitigate more than 50,000 tons of CO2 emissions every year. In 2019, CapitaLand Commercial Trust (CCT) issued its first green bonds.
According to MAS, the green bond market stands at S$6 billion, with both domestic and foreign issuers being the participants. The report issued by MAS also stressed on how Singapore can play a dominant role in promoting climate-resilient and environmental-friendly model in Asia. Market experts are hopeful that statutory boards in Singapore may choose to issue green bonds. They may do so in public transport and sustainable housing projects. Internationally, the most preferred sector for statutory boards to issue green bonds is transport, with infrastructure and housing representing other vital sectors. As such, the city-state’s regulatory boards could further fuel the growth of green bonds.
The pluses of green bonds are many, and since they target the environmental-friendly segment, they have attracted broad interest. But the question is whether all proceeds raised through the issuance of these bonds go into green projects or are they diverted to non-green expenses. With proper checks in place, it can be anticipated that fund utilization will be ethical. Singaporean government has been an enabler in this market, and the schemes aimed at reimbursing companies issuing green bonds the costs incurred on assessments are in the right direction. Now we have to see how much time it will take for this market to mature and truly deliver on the potential.