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Views: Scaling climate finance and the opportunity for Singapore's financial sector

Dave Sivaprasad and Andrew Hardie
Dave Sivaprasad and Andrew Hardie • 6 min read
Views: Scaling climate finance and the opportunity for Singapore's financial sector
Asia’s rapid growth will generate the greatest need for financing, according to a report by BCG and GFMA.
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Singapore is a regional finance leader and has taken progressive steps towards building a leadership position in sustainable and climate financing in recent years.

A report from Boston Consulting Group (BCG) and the Global Finance Markets Association (GFMA), titled “Climate Finance Markets and the Real Economy”, describes a significant US$3 trillion ($4 trillion) to US$5 trillion annual financing need and opportunity for financial institutions and in the coming years.

The report features proprietary analysis of the climate finance market and 10 economic sectors that account for 75% of global greenhouse gas (GHG) emissions. Commissioned and produced in collaboration with 13 global banking and capital markets firms, the report is based on interviews with more than 100 market participants from a range of corporate sectors, banks, asset owners and managers, multilateral organisations, financial regulators, and other key market enablers.

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The green financing opportunity

This global shift unlocks a substantial financing opportunity that is essential in meeting the commitments of the Paris Climate Agreement, mitigating carbon emissions, and avoiding the worst impacts of climate change.

The combined financing requirement for this global climate pathway will be between US$100 trillion and US$150 trillion over the next three decades. Climate finance will need to scale across all asset classes, with financing raised across a range of instruments, with estimates in the range of 35% in equity, 44% in loans, and 21% in bonds.

This will require rapid scale in asset classes such as equity, structured finance, and bank-intermediated lending, at the same time connecting climate-related metrics and outcomes to key market activities such as derivatives and securities lending.

Such a seismic shift will not only provide a valuable opportunity for banking and capital markets to steer positive change, but also create new revenue opportunities.

Climate finance across debt and equity capital markets, syndicated and bilateral lending, project finance, structured products, derivatives, and securities finance represents an estimated global revenue pool of more than US$25 billion annually over the next decade.

Leading global banking and capital markets firms will play a critical role as lenders, book runners, arrangers, asset managers, and investors. These stakeholders have stated a combined ambition to add US$250 million to US$1 billion to their revenue pools to 2030.

Asia’s significant investment needs

The report reveals that Asia’s rapid growth will generate the greatest need for financing, estimated at US$66 trillion, equal to approximately 55% of the global total. This is driven by the scale and pace of the region’s economic growth, expanding populations, increasing urbanisation, and rapid industrialisation.

Loans are likely to form the greatest investment need in the region, at almost half (47%) of Asia’s climate-positive investment needs. Equity (37%) and bonds (16%) will make up the remaining shortfall.

Power, responsible for around 30% of total global emissions, will require transformation investment of around US$59 trillion, with over half (US$34.3 trillion) of that global investment concentrated in Asia. The region’s cement industry will require another US$1 trillion, aviation US$2 trillion, light road transport US$1.6 trillion, and heavy road transport US$9.9 trillion, with the greatest global share of investment needs by sector all focused in Asia. Chemicals, shipping, agriculture, iron and steel, and buildings are all sectors which echo this trend.

Singapore well positioned to lead climate financing charge

Asia is by far the region of greatest investment need, and Singapore is well-positioned to meet that need, with a developed financial services sector and positive global reputation. The nation boasts the capabilities to drive this transformation, with experienced professionals and a transparent regulatory framework.

Singapore has already made steps to embrace this transition as part of the country’s Green Plan. For example, plans were announced for the Singapore Green Finance Centre, aiming to undertake research and train professionals to become green finance experts. This sits alongside wider plans to focus on FinTech as a partner in the sustainability journey.

The nation’s green ambitions played a prominent role in the recent Singapore Budget 2021, where, amongst other initiatives, commitments were made to issue capital green bonds for infrastructure projects with a value of $19 billion to date.

Climate-positive capital shifts are already evident in Singapore. State-owned investment firm Temasek has committed to halving the GHG emissions of its portfolio by 2030. The Monetary Authority of Singapore has established a US$2 billion green investment program to support the nation’s financial centre in driving forward sustainable investment. Amplifying and expanding on such efforts offers the chance for Singapore to become a regional champion of sustainable investment.

SEE:Stress-testing climate change scenarios

Overcoming climate capital challenges

It is clear meeting these significant investment needs will not be without challenges. The most evident is the need to rapidly accelerate and mobilise climate financing, growing from US$600 billion today to the potential US$150 trillion required.

Establishing and aligning taxonomic definitions and regulatory frameworks represents another key challenge. Aligning definitions and principles will be critical in assessing the climate-positive value of a potential investment, reducing transaction costs, and steering capital flows in the most impactful way.

This alignment reflects another difficulty around reporting, and how companies maintain existing financial reporting standards alongside more long-term climate-related reporting.

The global energy transition reflects a growing pressure and opportunity for green financing. In navigating this transition, we have identified 10 key actions for banks and capital market firms to undertake:

  1. Partner and support your clients as a strategic advisor to help them navigate the climate transition landscape and transition pathways,
  2. Mobilise new sources of patient, high-risk capital to meet the transition needs of your clients, while partnering research labs to foster climate-focused innovation companies,
  3. Develop appropriate products and deploy capital aligned with climate transition finance (not limited to green only)
  4. Refresh your sector and client strategy through a climate lens,
  5. Mobilise collaboration with the public sector, social sector, and standard-setting bodies,
  6. Scale the use of pooling and securitisation while developing suitable derivative markets,
  7. Establish a robust product suite and market for derivatives and structured products,
  8. Integrate climate into risk management and move towards quantitative assessments,
  9. Build a robust climate data and technology platform to support strategic decision-making,
  10. Embed climate risk management into your governance framework and operating model.

Climate financing is set to become a US$100 to US$150 trillion market over the next three decades. At the same time, external pricing factors such as carbon prices will increasingly influence investment decisions.

Singapore is in a unique position to drive forward a climate-positive future. With its respected global finance base, and transparent regulatory frameworks, it offers fertile ground for climate financing success.

Dave Sivaprasad is managing director and partner, SEA Leader for Climate Action, at Boston Consulting Group; Andrew Hardie is managing director and partner, at Boston Consulting Group

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