Sustainability trends that are set to change businesses in 2021
Transition finance enables companies to take instrumental steps to be less carbon-intensive and less polluting.
Since the signing of the Paris Agreement five years ago, Southeast Asia has made progress in its shift to decarbonisation. Still, according to Yulanda Chung, DBS’ Head of Sustainability, more needs to be done. What does this year hold for the region in terms of sustainability? What are the key trends that business leaders must take note of and address? In this latest Business Insights article, we outline the key considerations for leaders serious about elevating the sustainability conversation and implementing real change in the year ahead.
With a solid call to action for businesses globally and in the region to drive the sustainability conversation, DBS is excited about shaping a greener future. Recent initiatives include launching the world’s first sustainable and transition finance framework and taxonomy.
“Transition finance enables companies to take instrumental steps to be less carbon-intensive and less polluting, with the ultimate vision of net-zero emissions by 2050,” shared Yulanda Chung, DBS’ Head of Sustainability, Institutional Banking Group.
Southeast Asia has come a long way when it comes to sustainability progress
For example, Singapore is the first country in the region to implement a carbon tax; revenue from the tax will be channelled into energy-efficiency schemes and emission-reduction projects1. Malaysia has developed a Green Technology Master Plan, which supports green technology adoption and aims to reduce greenhouse gas emission intensity by 45 per cent by 20302. The Philippines has a Climate Change Commission that actively develops climate financing, education, and decarbonisation policies to reach its ambitious pledge of 70 per cent emissions reduction by 20303.
Yet, despite these commendable developments, much more can be done. “We’re running out of time,” said Yulanda while speaking at a fireside chat, Sustainability – A Green Reset for Digital Transformation. “There isn’t enough urgency from the public nor private sector in addressing the environmental crisis as a crisis.”
There have been public-private partnerships (PPP) to champion sustainability. An SGD 40 million loan facility to Sembcorp Industries to build an inland floating solar plant in Singapore and the Public Utilities Board is scheduled to be completed in 2021. DBS is the sole financier for this project, which is one of the largest globally, offsetting about 32 kilotons of carbon annually – equivalent to taking approximately 7,000 cars off the roads. We need more of such examples to turn sporadic development into systemic change.
Most recently, the bank was also advisor and global co-ordinator to Indonesian agri-food company’s, Japfa, USD 350 million 5-year bond sustainability-linked bond4 – a transaction that not only recorded the first sustainability-linked bond from Indonesia, but also from the global agri-food industry. The bond is linked to a sustainability performance target to construct water recycling facilities to minimise water pollution.
Transition and sustainable finance deals are growing
A few recent deals by DBS are symbolic of the bank’s plan to grow transition financing. DBS launched a landmark partnership with Inditex, the owner of high-street fashion brands such as Zara and Bershka. The organic cotton procurement financing pilot programme aims to work with over 2,000 Indian farmers in Inditex’s procurement network, helping the farmers move towards more sustainable farming practices.
Sembcorp Marine Ltd secured an SGD 500 million SORA-based sustainability-linked loan with DBS, dovetailing Sembcorp’s ongoing pivot into sustainable engineering solutions such as scrubber installation, ballast water management system retrofits and gas and renewable energy projects.
In June 2020, Keppel Infrastructure Trust and Keppel Energy got an SGD 700 million sustainability-linked loan with targets tied to greenhouse gas emissions reduction, one of the largest for the power generation sector.
Against a landscape of ongoing uncertainty and disruption, one thing is sure — sustainability will continue to be on top of the agenda in the year ahead. Here are the top three trends that will continue to dominate and that every leader must address:
- Strong ESG performance can lead to lower cost of financing
Recent findings provide evidence that companies with good ESG ratings have historically proven to deliver higher returns and lower idiosyncratic tail risks. The positive correlation between companies’ ESG performance and their equity valuation has been borne out in multiple peer-reviewed studies. ESG-themed investment witnessed record fund inflows in 20205. The relationship with credit ratings is also being established, with the preliminary analysis pointing towards a positive correlation6. More sustainability-themed bonds have succeeded in achieving tighter pricing or a ‘greenium’.
- Customers demand genuine action and greater transparency
Customers today scrutinise a company’s sustainability agenda, and this informs their purchasing decisions. Environmental, social, and governance (ESG) factors are also popular metrics for investors to evaluate risk and grow opportunities. With the pandemic bringing out stark social inequity, the ‘S’ in ESG has become more prominent.
“Stakeholders now expect banks like DBS to measure and disclose our Scope 3 emissions, primarily emissions arising from our customers’ use of resources,” Yulanda shared.
Scope 3 emissions include a company’s indirect carbon footprint (such as emissions associated with the supply chain, employees’ business travel and customer activities).
“It’s not only about getting your own house in order but also about what we finance. Consumers care about how we channel capital to the right places,” asserts Yulanda. “Be honest with the limitations we face as a bank in financing the real economy’s often polluting components and set out a path to do better.”
- Sustainability is a collective responsibility
Till a few years ago, sustainability was considered the responsibility of C-suite leaders. But today, it is regarded as a collective societal responsibility.
Companies are involving more of their workforce. For example, when thinking about Scope 3 emissions (emissions from every aspect of a business’ value chain), it is easy to see how every aspect of the business reduces its overall carbon footprint: HR, procurement, operations are just a few departments involved.
“Nowadays, it is all hands on deck. Sustainability is no longer just the responsibility of the environmental or health and safety departments,” according to Yulanda. “At client meetings, I’m not just meeting with sustainability personnel. I’m meeting with a range of stakeholders from the CFO and Treasurer to frontline managers.”
Transition finance provides the bridge for industries to go green
There are sectors and companies beyond the dark green segments (such as renewable energy projects or green buildings) representing the bulk of the real economy that need to tap into sustainability financing.
“These companies may be in heavy industries which have yet to find commercially viable solutions to go greener. Take an example of grid upgrades; when the transmission and distribution system in the power sector needs to be upgraded to accommodate more intermittent renewable energy, this may not be considered dark green,’’ explains Yulanda.
However, through the bridge that transition finance provides, these projects can enable decarbonisation.
“We will make sure we are on track to meeting our sustainable financing goals,” Yulanda said about the importance of meeting DBS’ ambitious target of SGD50 billion in sustainable financing by 2024.
Find out what DBS is doing to help businesses achieve sustainability in their operations. Visit https://www.dbs.com.sg/corporate/sustainability
References
[1] https://www.straitstimes.com/world/carbon-tax-a-key-step-in-spores-climate-strategy-masagos
[2] https://www.malaysia.gov.my/portal/content/30920
[5] https://www.cnbc.com/2020/09/19/esg-sees-record-inflows-in-2020-top-issuer-talks-staying-power.html
[6] https://www.greenbiz.com/article/can-sustainable-companies-get-lower-cost-capital
