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In this Policy Explainer, find out...
What is the Finance for Net Zero (FiNZ) Action Plan?
Why was the FiNZ Action Plan formulated?
What are some potential concerns surrounding the FiNZ Action Plan?
Mobilising Finance for Net Zero
On 23 April 2023, the Monetary Authority of Singapore (MAS) launched the Finance for Net Zero (FiNZ) Action Plan. It aims to mobilise the financing required to drive decarbonisation and the net zero transition in Singapore and Southeast Asia.¹ The FiNZ Action Plan builds on MAS’ Green Finance Action Plan, which was launched in 2019, to include transition finance, which refers to funding that supports firms and industries in their shift from high-carbon to low-carbon and sustainable operations.
Why was the FiNZ Action Plan Formulated?
Up until October 2022, 85 countries, including Singapore, have shared their goals to achieve net zero emissions, with Singapore aiming for this by 2050. Singapore also plans to lower its emissions to around 60 metric tons of carbon dioxide equivalent (MtCO₂e) in 2030 after they reach their highest level.²
Yet, the actions taken to date fall short of ensuring global net zero emissions by 2050. In Southeast Asia itself, there is a US$1.5 trillion (~S$2 trillion) cumulative investment gap required to meet the region’s Nationally Determined Contributions (NDC) targets.³ More investment is required to simultaneously fund the phasing out of traditionally carbon-intensive industries (e.g., coal-fired power) as well as develop new carbon neutral industries (e.g., renewable energy, nature based solutions). The FiNZ Action Plan thus aims to address this problem by making it easier for investors to obtain the necessary information to make informed investments in Singapore as well as the region.
What is the FiNZ Action Plan?
In order to assist and incentivise Financial Institutions (FIs) to make the transition to green finance, the FiNZ action plan utilises a four pronged approach:⁴
Enforcement of International Sustainability Standards
Supervision of Green Transition Processes for Firms and FIs
Creation of Reference Regional Carbon Emissions Reduction Reference Plans
Financial Incentivisation to Undertake Transition
1. Enforcement of International Sustainability Standards
To ensure firms and FIs are able to understand and execute green financing plans, they need to have a clear set of guidelines to follow. MAS thus aims to create and enforce a sustainability code of conduct among Environmental, Social, and Governance (ESG) rating firms that assess and score companies on their ESG practices to provide insights for investors seeking sustainable and ethical investments while highlighting a firm's long-term risk and opportunities.⁵ This will ensure greater transparency between these rating firms and their clients (e.g., FIs, banks or asset managers) regarding how the ratings are determined, allowing for more effective decision making by clients.
Furthermore, MAS aims to work directly with agencies such as the Singapore Exchange Regulation and the Accounting and Corporate Regulatory Authority on areas such as streamlining green standards on an international scale, increasing transparency on green standards across borders, and removing administrative barriers associated with international green transactions.⁶ These changes will make it easier for firms to conduct green transactions.
2. Supervision of Transition Process for Firms and FIs
To ensure that FIs are implementing credible transition plans as they shift investments toward greener industries, MAS will directly supervise firms’ transition plans, for instance, by setting up evaluation workshops with experts, and enhance the use of climate scenario evaluations and stress tests to find financial risks linked to climate change.⁷ This will facilitate the development of transition plans that rigorously incorporate green practices.
3. Creation of Regional Carbon Emissions Reduction Reference Plans
Reference plans may accelerate firms and FIs’ green transition by providing a template for them to base their plans on. To achieve this, MAS is working with international agencies like the International Energy Agency to create sector specific decarbonisation reference plans that can be used and adapted by firms and FIs for their transition.⁸ This will reduce the burden of research and brainstorming on the firms and FIs and allow them to quickly implement decarbonisation plans.
4. Financial Incentivisation to Undertake Transition
There are three main tools used to create financial incentives for firms and FIs:⁹
a. Sustainable Bonds and Loans b. Insurance Related Grants c. Carbon Services and Markets
a. Sustainable Bonds and Loans
To support firms and FIs in their green transition, MAS has moved to include transition bonds and loans under their sustainable bond and loan schemes, allocating S$15 million per annum for five years to alleviate costs.¹⁰ To make sure that these firms are not using the funds fraudulently, MAS will also require firms choosing to issue or borrow from these sources to make detailed sustainability reports to increase transparency on their emissions. This will further incentivise firms to increase the rigour of their sustainability reporting.
b. Insurance Related Grants
MAS has also extended the Insurance-Linked Securities Grant Scheme to the end of 2025 to promote the growth of Singapore’s insurance-linked securities market.¹¹ This will be achieved by subsidising issuance costs for such securities, thereby facilitating the growth of catastrophe bonds and other climate change related instruments that help to offload climate change risks to investors.¹²
They have also set aside S$15 million to cover the costs of issuing these tools.¹³ This will help the Government raise funds for the development of natural disaster solutions and other climate change risks. This also presents a financial incentive for firms to tackle climate change problems, given that they will be insured against potential risk-related losses.
The Government promises a return on investment if firms choose to invest in these bonds. Alternatively, firms will be able to receive funding from the government if they undertake activities related to climate change risk mitigation.
c. Carbon Services and Markets
MAS will also work with businesses and nongovernmental organisations (NGOs) to further develop funding to support decarbonisation efforts in carbon intensive industries. In this case, the creation of carbon service and carbon credit markets allows companies to buy and sell permits that allow them to emit a certain amount of carbon.¹⁴ The sale of carbon credits constitute an additional source of revenue, providing additional incentives for companies to undertake these decarbonisation projects.
Concerns
Guarding against Greenwashing
The FiNZ Action Plan aims to combat greenwashing by strengthening the regulatory environment surrounding green loans and SLLs.
Greenwashing occurs when firms overstate how sustainable their operations really are.¹⁵ For example, a firm can falsify the amount of carbon emissions it has reduced in a financial year in order to qualify for green loans. Green loans provide firms with an additional source of capital, provided that they meet certain standards that are set out in the loan agreement.¹⁶
Singapore has established itself as a hub for green financing, offering both traditional green loans and Sustainability-Linked Loans (SLLs).¹⁷ Unlike green loans, SLLs enable borrowers outside conventional 'green' sectors, such as the automotive firms, to secure sustainable financing. However, the Net Zero Tracker indicates that some sustainability targets do not meet the strict criteria for SLLs because they are based on outdated research.¹⁸
Recent research has also shown that after obtaining sustainable loans, some borrowers' ESG scores may decline, especially in cases where the specific ESG terms of loans are not clearly outlined. To this end, MAS hopes to fortify the credibility of these evaluations and create consistency across borders through the introduction of industry-standards, as outlined in the FiNZ Action Plan. This move is supported by research findings that highlight how stringent governmental environmental mandates can increase the correlation between a firm's ESG prowess and its financial performance,¹⁹ as well as how government ownership can have a profound influence on a firm's environmental allegiance.²⁰
As Singapore takes the lead in setting stringent standards, other Asian countries may also follow suit. This would result in a region-wide adoption of standardised green practices and benchmarks.
Greater Clarity on the Carbon Credits System
While the carbon credit system introduced by the FiNZ Action Plan will allow companies to achieve financial gain from reducing their own emissions, it is by no means a perfect system.
Firstly, it operates under a key assumption — the revenue earned from selling extra carbon credits is greater than the cost of adopting new sustainable processes. If this condition is not met, firms are unlikely to be incentivised to transition to greener processes. Secondly, there is a risk that the carbon credits issued are fraudulent and the marketed emission reductions are not actually achieved. For instance, it was found that 90% of their rainforest offset credits from Verra, a leading carbon credits provider, did not represent any genuine reduction in emissions.²¹ Yet, they had been purchased by major companies such as Disney, Shell, Gucci and other large corporations to justify their operations as ‘carbon neutral’.²²
Such an issue may also develop in Singapore, where the carbon credit market is newly developed and more prone to deceptive reporting and loophole abuse compared to older, more developed markets. To this end, it is important for the Government to rigorously make sure that there are no fraudulent credits being sold into the market. Enforcement of proper climate disclosures, expounded under the first pillar of the FiNZ Action Plan, will contribute towards this, thus complementing the development of Singapore’s carbon markets.
Conclusion
The FiNZ Action Plan represents Singapore's pro- active approach towards a sustainable future. On the one hand, by emphasising fundraising through green bonds, adopting international sustainability regulations, and leveraging targeted government funding, the plan underscores a commitment to fostering green technologies. On the other hand, these policies need to provide enough of a financial incentive to convince companies to switch from pre-existing, well optimised processes, and also make sure that firms do not try to overstate the impact of their environmental policies for private gain. Overall, this comprehensive strategy not only bolsters Singapore's green credentials but also positions it as a forerunner in driving regional decarbonization and sustainable development.
This Policy Explainer was written by members of MAJU. MAJU is an independent, youth-led organisation that focuses on engaging Singaporean youths in a long-term research process to guide them in jointly formulating policy ideas of their own.
By sharing our unique youth perspectives, MAJU hopes to contribute to the policymaking discourse and future of Singapore.
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