Green Financing - The State of Play in Singapore.
Legal News & Analysis - Asia Pacific - Singapore - Banking & Finance
12 March, 2019
The global pursuit of the 2030 Agenda for Sustainable Development presents tremendous investment opportunities for the private sector, because public financial sources alone will be insufficient to finance the transformation to a more sustainable world. Singapore’s status as a financial hub ensures an opportunity for its banks to play a significant role to contribute to the closing of the substantial financing gap for such investments, particularly in this region. By providing “green” financing solutions, such as green lending and channelling green investment in capital markets, banks in Singapore can contribute to meeting the strong demand for additional green investment in the region and make a positive impact towards a more sustainable world.
Types of Green Finance
Green bonds loosely refer to bonds whose proceeds will be invested in green projects or to promote environmentally sound corporate policies and behaviours. The purpose(s) for which the proceeds may be used for are specified to varying degrees of specificity in the bond documentation. Such bonds have been issued by sovereign and supranational entities such as the World Bank as early as more than a decade ago, but corporate issuers of green bonds are a more recent phenomenon. As interest in green bonds increases along with the growth in the green bond market, the need for standards in green bond become increasingly important.
Green loans are an even more recent type of green financing, again loosely referring to loans whose proceeds are used for green projects or ventures. Similar to green bonds, the purpose(s) for which the loan may be drawn down for is specified in the loan documentation.
While green bonds and loans typically refer to financing for green projects, they can also be used to promote green policies and behaviours. One example of such instruments are sustainability-linked loans which can be used to fund general corporate purposes. The margins of such loans are pegged to agreed sustainability criteria that can either be binary or based on a scale, depending on the company’s performance against a range of criteria. Sustainability-linked loans have become quite popular in recent years, with entities such as Wilmar International Limited1 and Olam International Limited2 having secured sustainability-linked facilities in 2018.
Lenders and borrowers are actively considering green finance for various reasons, including:
New investment opportunities
Demand for green finance is growing at a phenomenal rate – investors can tap on the new investment opportunities represented by this growing pool of borrowers. Demand for green investment in the Association of Southeast Asian Nations (“ASEAN”) region, from 2016 to 2030, is estimated at US$200 billion annually against the annual flow of supply at US$40 billion3. Green finance investment opportunities in ASEAN from 2016 to 2030 will thus likely far outstrip the current supply of green finance.
Sustainable borrowers may be better borrowers
Research has identified sustainability factors as useful tools to assess a company's corporate risks, strategies and operational performance. Borrowers who perform positively against such factors are thought to possess desirable management qualities and therefore better creditworthiness. In Singapore, some banks have established internal policies to include sustainability criteria as a component of the bank's credit evaluation and approval process.
Corporate governance and reputation
Corporates are increasingly called upon to be socially responsible in the way they conduct businesses. Globally, it is increasingly accepted that environmental, social, and governance issues are a component of the fiduciary duties of investors' and asset managers.4 In Singapore, companies listed on the Singapore Exchange Limited are now subject to sustainability reporting requirements on a "comply or explain" basis.5 The Association of Banks in Singapore has also sought to enlist the help of banks in Singapore to raise the bar for responsible finance in Singapore by issuing the Guidelines on Responsible Financing.6
These industry guidelines are meant to assist banks in integrating environmental, social and governance criteria into the risk assessment and lending decision- making processes, and being more accountable or transparent on such environmental, social and governance issues.
Against this backdrop, stakeholders often see participation in green finance as a display of corporate social responsibility, and a means of demonstrating to the public their innovativeness and leadership in their respective fields.
Green finance standards
There are currently no universal or official definitions or standards for green financing instruments,7 and the benefit of this is that stakeholders have the flexibility of structuring the products in a way that works for them and their circumstances. However, as interest and demand for green financing surges, the absence of common definitions and standards creates uncertainty about the quality of the green attributes professed in the products, prevents data collection and comparative analyses, and is an impediment to the mainstreaming of green financing products. The European Commission is currently working on a regulatory framework for sustainable financing that includes a unified classification system for sustainable economic activities, a European Union green bond standard, methodologies for low-carbon indices, and metrics for climate-related disclosure.8 Such a framework may have an impact beyond Europe and catalyse reforms elsewhere, and accelerate the harmonisation process.9
Green Bond Principles and Green Loan Principles
In lieu of standard definitions and standards, there are currently a number of voluntary principles and standards in use by stakeholders.
First launched in 2014 and recently updated in 2018, the International Capital Markets’ Green Bond Principles (“GBP”)10 are a prominent set of voluntary guidelines that are often used by issuers and investors as a starting reference point. Like green bonds, there is no universal definition of green loans, but lenders and borrowers often use the Green Loan Principles (“GLP”),11 modelled after the GBP, and launched in 2018, as their starting reference point. Under the GLP, a green loan is defined as "any type of loan instrument made available exclusively to finance or re-finance,12 in whole or in part, new and/or existing eligible Green Projects", and is extended to apply to revolving credit facilities. Both the GBP and GLP utilise the following factors to determine the characteristics of a green bond or loan:
(a) Use of proceeds – the green bond or loan should be utilised for projects with environmental benefits. This is arguably the core requirement of the GBP and GLP. Both the GBP and GLP identify several indicative broad categories of projects which contribute to environmental objectives, such as climate change mitigation and pollution prevention and control, and are eligible as green projects;
(b) Process for project evaluation and selection – issuers and borrowers should clearly communicate to their investors their environmental sustainability objectives, the process by which they determine how its projects are eligible green projects, and the process applied to identify and manage potentially material environmental risks associated with the proposed projects;
(c) Management of proceeds – internal procedures should be in place to ensure that proceeds are segregated or otherwise tracked by the borrower or issuer in an appropriate manner for application towards the eligible green projects in a proper manner; and
(d) Reporting – issuers and borrowers should make and keep readily available and updated information on the use of proceeds. The reporting of the expected impact of these projects is also recommended. The GLP suggests in this regard that due to the private nature of loans, reporting may be provided only to the lenders, although public disclosure in the interest is also encouraged.
The GBP and GLP recommend that bond issuers and parties to a loan, submit qualifying bonds and loans for external review. These can vary in scope and can take various forms.
An independent reviewer may issue a second party opinion assessing the alignment of the instrument to the GBP or GLP. Alternatively, an independent reviewer may be commissioned to verify the issuer’s or borrower’s business processes, environmental criteria, or claims against designated internal or external criteria. Such processes, environmental criteria, or claims may also be certified against a recognised external standard by an accredited third party. The bond or loan or its associated framework, use of proceeds may also be rated or scored by qualified third parties, according to an established scoring/rating methodology.
Whether and what form of external review would depend on whether the costs of such review are proportionate to the potential reputational benefits from such review.13 Other considerations might be the size of the financing, and in the case of green loans, whether the lenders and borrowers already have a strong pre-existing business relationship.
Nevertheless, the GLP recommends that where appropriate, borrowers should make publicly available the report of the external reviewer or a summary thereof. Where a bond issuer or borrower has elected for self-review instead, the GLP recommends making publicly available the parameters by which a green project is assessed and information about the internal expertise to assess such parameters.
ASEAN Green Bond Standards
In 2017, the ASEAN Capital Markets Forum developed the ASEAN Green Bond Standards (“ASEAN GBS”). The standards are based on the GBP, but “aim to provide more specific guidance on how the GBP are to be applied across ASEAN”. The additional requirements of the ASEAN GBS are that “the issuer or issuance of the green bond must have a geographical or economic connection to the region”. Fossil fuel power generation projects are excluded from the ASEAN GBS. Issuers are required to disclose information on use of proceeds, project evaluation and selection, and management of proceeds to investors in the issuance documentation. Such information must be publicly accessible from a website designated by the issuer throughout the tenure of the ASEAN Green Bonds. Issuers are encouraged to go beyond annual periodic reporting on the allocation of proceeds. Lastly, while external review is voluntary, the external reviewers’ credentials and scope of review conducted must be made publicly accessible from a website designated by the issuer throughout the tenure of the ASEAN Green Bonds.14
Climate Bonds Standard
The Climate Bonds Initiative’s Climate Bonds Standard (“CBS”) & Certification Scheme aim to provide bonds and other debt instruments such as green bond funds, loan facilities, syndicated loans, and sukuk, with the credentials and assurance that proceeds from such bonds being used to finance or refinance climate-aligned projects that are consistent with a 2 degree Celsius warming limit, and are thus delivering a low carbon and climate resilient economy, including projects or assets that directly contribute to developing low carbon industries, technologies and practices that mitigate greenhouse gas emissions consistent with avoiding dangerous climate change, or essential adaptation to the consequences of climate change.
The CBS can complement the largely procedural GBP and GLP in that while these principles suggest broad project categories that are consistent with the principles, they essentially leave the bond issuer or parties to the loan agreement to determine the criteria for determining the qualifying projects.15 The CBS provides a sector-specific taxonomy of assets or projects that are automatically compatible with a 2-degree trajectory and therefore eligible for certification, or incompatible with the trajectory and incompatible for certification.
A third category of assets or projects may be compatible with the trajectory and eligible for certification, subject to satisfying set screening requirements.
External certification that the use or allocation of proceeds to eligible projects that adhere to CBS and sector- specific criteria, is carried by verifiers approved by the CBS scheme.16
In the absence of an authoritative or universally agreed definition of a green bond, complementing the GBP with CBS, confers greater investor confidence in the environmental benefits of a proposed green bond, and helps a bond issuer reap greater reputational benefits.17 In 2017, for example, Madrid based Repsol SA (“Repsol”) issued a EUR500m bond maturing in 2022, to finance and refinance energy efficiency investments in Repsol’s chemical and refinery facilities in Spain and Portugal.18 The bond satisfied all the requirements of the GBP, and its transparency and use of proceeds are laudable in their own right.19 However, the labelling of the bond as “green” attracted controversy because the refineries are processing fossil fuels and, any investment in making the refineries more efficient, as this bond aimed to do, will likely extend plant operating lifetimes and therefore indirectly increase emissions over time. Thus, the improvements invested in are not seen as substantial enough to be consistent with a low carbon economy. The bond was thus excluded from major green bond indices and the Climate Bonds Taxonomy.
Legal issues to consider when venturing into green finance
There are currently no universal or official definitions or standards for green financing instruments,20 and the benefit of this is that stakeholders have the flexibility of structuring the products in a way that works for them and their circumstances. However, as interest and demand for green financing surges, the absence of common definitions and standards creates uncertainty about the quality of the green attributes professed in the products, prevents data collection and comparative analyses, and is an impediment to the mainstreaming of green financing products. The European Commission is currently working on a regulatory framework for sustainable financing that includes a unified classification system for sustainable economic activities, a European Union green bond standard, methodologies for low-carbon indices, and metrics for climate-related disclosure.21 Such a framework may have an impact beyond Europe and catalyse reforms elsewhere, and accelerate the harmonisation process.22
Risk of "greenwashing"
"Greenwashing" is a term commonly used to refer to the misleading practice of overstating the environmental benefits of a product, project, technology or service. There are concerns that borrowers may mislead investors about the environmental benefits of a project, or misuse the proceeds for non-environmental purposes. Public or investor perception of greenwashing can also be counterproductive and pose serious reputational risk to various stakeholders, including bond issuers and underwriters, borrowers and lenders, and also the various third- party verifiers.
The lack of identifiable definitive standards on "green" projects contributes to this problem.
For example, most standards, including the GBP and GLP, lack prescriptive environmental performance standards that a project should possess. Without benchmarks for measuring the actual environmental performance, its essentially procedural standards may not address the fundamental question of how to identify and assess the benefits of a green project.
There are more robust benchmarks that can help investors identify green projects that are worth investing in. Investors can consider complementary benchmarks such as the CBS that consider the actual environmental
benefits that is or will be achieved by the green projects. Many financial institutions have also developed their own green indices to benchmark the performance of borrowers and their bond issuances. Examples of such indices include the S&P Dow Jones Green Bond Index and the Bank of America Merrill Lynch Green Bond Index.23
Independent verification by third parties
External third-party assessment of loans or bonds against internationally recognised standards can provide investors assurance of the green credentials of a loan or bond. When undertaking external third-party accreditation for green bonds and loans, investors should consider the experience and independence of such verifiers and the methodology or benchmarks used. External reviewers are commonly engaged for such accreditation services. Investors can also consider the CBS's list of approved verifiers that can provide independent assurance based on sector and geography expertise. Where external review is required, the requirement may be spelt out in the finance documentation.
Compliance and enforcement
Disclosures regarding the manner in which the management of companies engage with environmental and sustainability issues, and certification of management claims by external reviewers, help investors to make informed decisions and keep bond issuers and borrowers accountable. However, how much disclosure and the extent of review will vary from case to case. Furthermore, non-compliance of green covenants, such as those related to use of proceeds, reporting and external review, is typically not considered in the bond or loan documentation to be an event of default. However, the documentation may stipulate the compliance with such covenants as conditions precedent to each drawdown of new funds, without necessarily making the failure to meet them, events of default for outstanding debts.
With sustainability-linked loans, the typical recourse is for interest rates to be varied depending on the borrower’s ability to maintain or meet green criteria.
There are additional costs involved for green bonds and green loans. Such costs include additional expenditure for defining the green criteria, monitoring and maintaining the proceeds, and communicating the performance to investors over the tenure of the loan or the bond. Certification and due diligence by third parties for green finance can also be costly.
Bond issuers may take advantage of the Monetary Authority of Singapore's Green Bond Grant scheme, introduced to provide 100% reimbursement of the additional costs (up to S$100,000) of obtaining an external review of a green bond issued in Singapore.24
The green finance market in this region is still in its infancy, but will only continue to expand in the future with growing public environmental awareness. Green finance will continue to present itself as a source of investment opportunities, and investors, lenders and borrowers should continue to monitor its development in the coming years.
1 Wilmar International Limited secured a US$200 million revolving credit facility with Overseas-Chinese Banking Corporation (“OCBC”). The interest rate of the facility was pegged to its sustainability performance. See OCBC, “OCBC Bank Partners Wilmar on Largest Sustainability- linked Bilateral Loan by a Singapore Bank”, (8 June 2018), <https://www.ocbc.com/group/media/release/2018/ocbc_partners_wilmar_on_largest_sustainability_linked_bilateral_loan.html>.
2 Olam International Limited (“Olam”) secured a three-year sustainability-linked revolving credit facility aggregating US$500 million with 15 club lenders. See Olam, “Olam International Secures Asia’s First Sustainability-Linked Club Loan Facility of US$500.0 million”, (26 March 2018), <https://www.olamgroup.com/news/all-news/press-release/olam-international-secures-asias-first-sustainability-linked-club-loan-facility- us500-0-million.html>.
3 Chui Fong Lee and Prajwal Baral, Green Finance Opportunities in ASEAN (UN Environment Inquiry and DBS, 2017).
See Freshfields, Bruckhaus Deringer, A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment (UNEP FI, October 2005), <https://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf>; Law Commission (LAW COM No 350), Fiduciary Duties Of Investment Intermediaries (LAW COM No 350) (30 June 2014), <http://www.lawcom.gov.uk/app/uploads/2015/03/lc350_fiduciary_duties.pdf>; Rory Sullivan, Will Martindale, Elodie Feller and Anna Bordon, Fiduciary Duty in the Century 21, (UN Global Compact, UNEP FI, UN PRI, Inquiry, 2015), <https://www.unepfi.org/fileadmin/documents/fiduciary_duty_21st_century.pdf>; and Rory Sullivan, Elodie Feller, Will Martindale, and Jessica Robinson, Investor Obligations and Duties in Six Asian Markets (UNEP FI, UN PRI, and Generation Foundation, 2016), <https://www.unpri.org/fiduciary-duty/investor-obligations-and-duties-in-six-asian-markets/266.article>.
5 Monetary Authority of Singapore, Code of Corporate Governance (6 August 2018), <http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulatory%20and%20Supervisory%20Framework/Corpor ate%20Governance%20of%20Listed%20Companies/Code%20of%20Corporate%20Governance%206%20Aug%202018.pdf>.
6 Association of Banks in Singapore, ABS Guidelines on Responsible Financing
(1 June 2018), <https://www.abs.org.sg/docs/library/responsible-finance-guidelines-version-1-1.pdf>.
7 A notable exception are the mandatory requirements on disclosure and the use of proceeds for green bonds issued in China.
8 European Commission, Sustainable Finance, <https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable- finance_en#commission-action-plan-on-sustainable-finance>.
9 Justine Leigh-Bell, “Green Bond Standards are Converging, says CBI”, (27 February 2019) Environmental Finance, <https://www.environmental-finance.com/content/news/green-bond-standards-are-converging-says-cbi.html>.
10 International Capital Market Association, Green Bond Principles Voluntary Process Guidelines for Issuing Green Bonds (June 2018), https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2018/Green-Bond-Principles---June-2018-140618-WEB.pdf>.
11 Loan Market Association, Asia Pacific Loan Market Association, and Loan Syndications and Trading Association, Green Loan Principles: Supporting Environmentally Sustainable Economic Activity (December 2018), <https://www.lma.eu.com/application/files/9115/4452/5458/741_LM_Green_Loan_Principles_Booklet_V8.pdf>.
12 Note the use by Frasers Property Limited (“Frasers Property”) of the net proceeds from its syndicated green S$1.2 billion five-year loan in 2018 to refinance existing loans relating to the development of its Green Mark Platinum office building, Frasers Tower. See Frasers Property, “Frasers Property Successfully Raises Singapore’s First Syndicated Green Loan”, (18 September 2018), <https://investor.frasersproperty.com/newsroom/20180918_173708_TQ5_CAP632EN4Y5X6F44.1.pdf>.
13 It might be thought that bonds, being more public instruments by nature, may benefit from external scrutiny; whereas loans, being essentially private agreements may not necessarily derive as much reputational returns as green bonds and therefore may not warrant incurring the disproportionate cost of external scrutiny. Nevertheless, Ho Bee Land Limited commissioned Sustainalytics to issue a second party opinion on the veracity/credibility of Ho Bee Land’s Green Finance Framework, and took up a green loan from HSBC Bank (Singapore) Limited (“HSBC”) under the framework. See HSBC, “Ho Bee Land Secures Singapore’s First Green Loan”, (24 August 2018), <https://www.about.hsbc.com.sg/news-and-media/ho-bee-land-secures-singapores-first-green-loan>; and Sustainanlytics, Second-Party Opinion: Ho Bee Land Green Finance Framework (July 2018), <https://www.sustainalytics.com/wp-content/uploads/2018/11/HoBeeLand-Green- Bond-SPO-final-13112018.pdf>.
14 ASEAN Capital Markets Forum, ASEAN Green Bonds Standards (November 2017), <http://www.theacmf.org/ACMF/upload/ASEAN_Green_Bond_Standards.pdf>.
15 For example, in 2017, City Development Limited (“CDL”), through its wholly-owned subsidiary, CDL Properties Ltd, issued a green bond aligned with the Green Bond Principles, which was also verified by KPMG against the CBS and was Singapore’s first green property bond certified under the Climate Bonds Low Carbon Buildings Criteria. See CDL, “CDL Issues the First Green Bond by a Singapore Company”, (6 April 2017), <https://www.cdl.com.sg/images/press_release/20170406.pdf>.
16 See for example, KPMG, Verification Report Based on Pre-Issuance Requirements of the Climate Bonds Standard: CDL Properties Limited – A subsidiary of City Developments Limited (April 2017), <https://www.cdl.com.sg/images/pdf/kpmg_verification_report.pdf>.
17 The green bonds issued by CDL in 2017, for example, is both aligned with the GBP and also CBS certified. See CDL, “CDL Issues the First Green Bond by a Singapore Company”, (6 April 2017), <https://www.cdl.com.sg/images/press_release/20170406.pdf>.
18 See Repsol Group, Green Bond Report 2017 (2018), <https://www.repsol.com/imagenes/global/en/green_bond_report_2017_tcm14- 134395.pdf>.
19 Andrew Whilely, “An Oil & Gas Bond We Knew Would Come Eventually: Repsol: Good on GBPs, Not So Sure on Green Credentials”, (23 May 2017), <https://www.climatebonds.net/2017/05/oil-gas-bond-we-knew-would-come-eventually-repsol-good-gbps-not-so-sure-green- credentials>; and Peter Cripps, “Of Repsol and Reputation”, (7 June 2017) Environmental Finance, <https://www.environmental- finance.com/content/analysis/green-bond-comment-june-of-repsol-and-reputation.html>.
20 A notable exception are the mandatory requirements on disclosure and the use of proceeds for green bonds issued in China.
21 European Commission, Sustainable Finance, <https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable- finance_en#commission-action-plan-on-sustainable-finance>.
22 Justine Leigh-Bell, “Green Bond Standards are Converging, says CBI”, (27 February 2019) Environmental Finance, <https://www.environmental-finance.com/content/news/green-bond-standards-are-converging-says-cbi.html>.
23 For example, CapitaLand Limited (“CapitaLand”) recently secured a multi-currency sustainability linked loan from DBS Bank Ltd for general corporate purposes and the financing terms were explicitly linked to CapitaLand's listing on the Dow Jones Sustainability World Index which is an index that tracks the performance of leading corporates in environmental, social and governance efforts. See Capitaland, “CapitaLand Secures First and Largest S$300 million Sustainability-Linked Loan in Asia’s Real Estate Sector”, (4 October 2018), <https://www.capitaland.com/international/en/about-capitaland/newsroom/news-releases/international/2018/oct/CapitaLand-secures-first- and-largest-300-million-sustainability-linked-loan-in-Asias-real-estate-sector.html>.
24 Calvin Hui, “MAS to Offset Cost of Issuing Green Bonds with New Grant Scheme”, (23 March 2017) Channel NewsAsia, https://www.channelnewsasia.com/news/business/mas-to-offset-cost-of-issuing-green-bonds-with-new-grant-scheme-8603578>. See also, Hogan Lovells, “MAS Green Bond Grant Scheme”, (2018), <https://www.hoganlovells.com/~/media/hogan- lovells/global/knowledge/publications/files/new-mas-green-bond-grant-scheme.pdf?la=en>.