The Monetary Authority of Singapore (MAS) highlights the need for transition finance in helping achieve global net zero targets, especially in Asia.
While MAS has committed itself to the issuance of green bonds, and set rules for the avoidance of greenwash and aligned its own sustainability objectives with the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD), managing director Ravi Menon said that transition finance was going to be a key factor in achieving long term sustainable growth.
In a speech he highlighted that green finance is proving a success, with 2021 seeing issuance reach $800 billion, a ten-fold increase from 2015. But, he said: “Where the industry needs to do better is in transition finance – to provide the funding support for companies that are not so green, to become greener. Last year saw just twelve transition bonds issued globally, amounting to $4.4 billion.”
Transition finance vs. green finance
MAS laments the lack of specifically labelled transition financing as a challenge to achieving the net zero goals tied to energy transition, citing the relative disparity between the green bond (53% of the total) and transition bond (0.5%) issuance in the APAC region, and a high proportion of hard-to-abate sectors. Yet, Moody’s sees the challenge of transition finance in the region being remedied via sustainability linked bonds (SLBs) and other transition instruments.
Flexibility in the use of funds from SLBs, which are not tied to specific projects or assets, but contribute to issuers’ overall transition strategies, may be a stop gap solution. However, scrutiny from financial regulators and mandates limiting the proportion of SLBs in portfolios focused on transitions may require higher issuance of transition bonds.
Menon said that MAS is keen to promote blended finance solutions to help fill Asia’s transition financing gap and will be hosting a pre-COP27 conference on blended finance.
To TCFD and beyond
MAS expects to remain proactive on aligning with the latest global standards, updating its TCFD alignment with standards from ISSB, by which it is signalling its own financial institutions and listed companies in Singapore to incorporate sustainability disclosures.
Together with Banco Central do Brasil, Bank of England and Banque de France, MAS is among a handful of central banks already making TCFD-aligned disclosures. Guidelines published by the Network for Greening the Financial System (NGFS), a network of 114 central banks and supervisors, has also published guidelines for its members advocating alignment with TCFD.
Setting a good example
Central banks can play a pivotal role by setting the standards that banks and other financial institutions need to follow, with a consequent impact on the wider economy. MAS seeks to create a climate resilient financial sector by deepening climate scenario analysis through stress tests, and incorporating climate risks into its supervisory framework as well.
The NGFS’ directives are targeted not just at central banks, but policy makers as well. Setting guidelines for the entire financial system could also influence corporate behaviour and improve disclosures. Finally, as the supervisor of banks and financial institutions, central banks could also set guidelines for transferred assets, which are key risk factor in achieving decarbonisation in the oil and gas industry.