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Burgeoning Green Finance Market
The green finance market is experiencing a rapid surge, with growing interest and investments in sustainable and environmentally friendly projects due to shifts in investor preferences, regulatory support and increasing recognition of climate change risks.
Renowned for its vibrant business landscape and thriving corporate sector, Singapore is increasingly witnessing a shift in investor expectations. As global attention on sustainability intensifies, Singapore’s corporations are facing mounting pressures from investors to prioritise sustainability and responsible business practices. With investors increasingly aligning their portfolios with sustainability principles, corporations in Singapore are compelled to adapt and address these concerns to secure long-term financial success and foster a sustainable future.
Despite the volatility of global market conditions marked by geopolitical uncertainties in 2022, the demand for green bonds has remained robust with Europe consistently taking the lead for green bond issuance. A contributing factor to 2022’s decline in issuance is corporations facing increasing scrutiny from investors and regulatory frameworks on their climate-transition plans. Corporations are therefore more careful and thorough before issuing green bonds.
Regional Breakdown of Green Bond Issuance
Source: Climate Bonds
According to MAS, the number of asset managers offering ESG strategies in Singapore has increased to 279 in 2021.
Asset Managers Offering ESG Strategies in Singapore
Source: MAS
ESG assets under management (AUM) grew by 77% year-over-year from 2020 to 2021, making up 58% ($3 billion) of total AUM. The steady increase results from growing investors' demand and interest in sustainability.
Outline of AUM with ESG in Singapore
Source: MAS
Investments in Brown or Green Corporations
“Brown” corporations are classified as the top 20% of greenhouse gas (GHG) emissions per unit of sales. These corporations have a negative impact on the environment of around 260 times that of green corporations. Examples of brown corporations include fossil fuel, coal-mining, chemical, single-use plastic manufacturers and deforestation-linked corporations.
“Green” corporations are classified as the bottom 20% of GHG emissions per unit of sales. These corporations have a positive impact on the environment. Examples of green corporations include banks, asset management firms, digital service providers etc.
The remaining 60% consists of “transition” corporations that have incorporated climate transition plans into their business operations, set targets to reduce emissions and are actively working towards these goals.
Activists Shaping a New Paradigm
Naturally, one would think that investors who are interested in sustainability should only invest in green corporations to highlight their heart for sustainability issues. These investors would be known as ‘impact investors’. Investing in brown corporations may reflect badly on their image as they would be seen as supporting corporations that have a negative environmental impact.
However, there are other types of investors such as activist investors who not only invest in green corporations but also brown corporations. Activist investors own a share in these brown corporations where they can voice concerns during shareholders’ meetings and have some power to influence change in corporate sustainability initiatives. Compared to traditional investors who are focused only on financial returns regardless of a company’s sustainability values, activist investors hold a significant role in pressuring corporations towards sustainability and holding corporations accountable for their transition plans.
The Crucial Role of Investing in Brown Corporations for Decarbonization
Research from Kelly Shue, Professor of Finance at the Yale School of Management, showed that investing only in green corporations may be counterproductive to reducing global GHG emissions as green corporations emit significantly lesser emissions than brown corporations due to the nature of their business model.
Investing in brown corporations potentially carries social backlash as investors may come across as “supporting” GHG polluters. However, if all investments are directed only to green corporations because of their comprehensive corporate sustainability initiatives, investment capital towards brown companies will be considerably reduced.
Instead of brown corporations being pressured to reduce their GHG emissions to gain back investment opportunities, they may look for ways to maintain their top and bottom line, potentially causing a further increase in emissions. Thus, removing capital from brown corporations may potentially have a negative impact on the environment as their investment efforts in renewable energy may be hindered. Ultimately, it boils down to brown corporations’ transition plans and their effectiveness in reducing emissions.
Stakeholders’ Influence on Corporations
Asset Managers
Asset managers play a crucial role in driving corporate change towards sustainability and responsible practices. They exert considerable pressure on corporations to address climate-related issues and integrate sustainability into their operations. One way they do this is by benchmarking their investments against market indices that now incorporate sustainability criteria. This trend compels corporations to improve their sustainability performance to remain eligible for inclusion in widely tracked indices, ensuring access to investments from asset managers and helping them uphold their share prices.
Let's take a closer look at some prominent examples of asset management firms:
BlackRock: BlackRock, one of the world's largest asset managers, emphasises the consideration of sustainability factors alongside traditional financial analysis to evaluate the long-term value and risk of their investments, regardless of whether a fund or strategy has a specific sustainable objective.
Fidelity: Fidelity employs an active ownership approach, engaging with investee corporations through meetings and proxy voting. Through these interactions, Fidelity discusses sustainability risks and opportunities with corporations, encouraging them to improve their sustainability practices.
Vanguard: Vanguard, known for its passive investment strategies, has also recognised the significance of sustainability considerations. The firm has been actively engaging with investee corporations to provide guidance on sustainability practices and encourage transparent disclosures.
Investor Initiatives: Climate Action 100+
In addition to the role played by asset managers, initiatives like Climate Action 100+ exert significant pressure on corporations to address climate-related issues and accelerate their transition to a sustainable future.
Climate Action 100+ is a global investor initiative that aims to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change. It brings together over 700 investors with a combined total of more than $68 trillion in assets under management. This powerful coalition of investors actively engages with the largest corporate emitters to drive change and align their business practices with the goals of the Paris Agreement.
Climate Action 100+ leverages its collective influence to engage with corporations through various means, including direct dialogue, filing shareholder resolutions, and voting on key climate-related issues during annual general meetings. The pressure exerted by Climate Action 100+ and its investor members is significant. By leveraging their substantial investment portfolios and influence, they can push for changes in corporate behaviour, investment strategies, and disclosure practices. This collective pressure from investors increases the likelihood of corporations taking concrete steps towards addressing climate risks and transitioning to a more sustainable business model.
How Investors’ Pressure Influences Corporate Sustainability Initiatives
In the absence of government regulations, corporations face mounting pressures from investors and consumers that they cannot afford to ignore. Socially conscious consumers are increasingly demanding products and services from corporations that align with their values, including strong sustainability practices. Failing to meet these expectations can result in reputational damage, reduced customer loyalty, and decreased market share. Embracing sustainability and responsible practices is not only a moral imperative but also a strategic necessity for corporations to thrive in today's consumer-driven market.
REANGLE’s Green Finance Consulting
REANGLE provides comprehensive Green Finance consulting services for corporations seeking finance for their sustainability business and remodelling their business towards sustainability by analysing sustainable-related financial data and complying with green regulations. REANGLE provides institutional investors with due diligence to manage climate and geopolitical investment risks through quantitative and qualitative analysis.
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