The Monetary Authority of Singapore (MAS) launched the world’s first grant program to support green and sustainability-linked lending, which took effect on January 1, 2021. The Green and Linked Loan Grants Program sustainability (GSLS) aims to improve the ability to obtain green and sustainability-linked loans. The program is also designed to facilitate green and sustainable lending by encouraging banks to develop frameworks for green and sustainability-linked lending. This follows the extension of the Green Bond Grant Scheme to the MAS Sustainable Bond Grant Scheme (SBGS) in February 2019. The SBGS aims to encourage the issuance of green, social, sustainable and sustainability-linked bonds in Singapore.

Corporate social responsibility (CSR) and environmental, social and governance (ESG) criteria have infiltrated financial services in recent years and we expect sustainable and green financing activity to resume in 2021. MAS predicts that US $ 200 billion per year in investment is needed in ASEAN by 2030 and Singapore’s financial sector can play a useful role in catalyzing sustainable and green finance in the region. MAS takes active steps to promote sustainable and green finance in Singapore’s financial sector. He implemented the Green Finance Action Plan, under which the GSLS and SBGS were launched, which aims to make Singapore a leading center for green finance in Asia and the world.

Understanding green and sustainable finance

Green finance

Green loans and bonds are a type of debt instrument made available exclusively to finance or refinance, in whole or in part, new or existing eligible green projects. The Climate Bonds Initiative, in developing the ASEAN Green Finance State of the Market 2019, for example, only considered bonds or loans where 95% or more of the proceeds were to go to mitigation projects, d adaptation or resilience to climate change.

Singapore is ASEAN’s largest green finance market, with issuance volumes of US $ 4.4 billion in 2019 – almost four times more than in 2018. Interestingly, the market growth of Singapore’s green finance is largely due to green loans, which account for around 40%. 2019 volumes. While green bonds still represent the bulk of the amount issued, nine of the 14 transactions in 2019 were loans. Singapore is also the most diversified ASEAN country in terms of currency of issue with issuers now denominated in nine different currencies such as USD, GBP, EUR, CNY and SGD.

Sustainable finance

Sustainability loans and bonds are types of debt instruments that incent the borrower to meet ambitious and predetermined sustainability performance goals (SPTs). This is achieved by aligning the terms of the loan or obligation with the borrower’s performance against these SPTs – for example, borrowers are rewarded with a reduction in the loan interest rate if their SPTs are met. A recent sustainability-linked loan is Olam International’s revolving credit facility, which includes an interest margin tied to the achievement of key sustainable performance indicators such as supporting prosperity for farmers and food systems, the development of prosperous communities and the regeneration of the living world. Thus, sustainable loans and bonds represent an opportunity for issuers to link their social and environmental improvement objectives to the cost of their borrowing.

Unlike green loans, there are generally no restrictions on the use of sustainability-related loan proceeds, and they can be used for general business purposes. For example, CapitaLand’s S $ 150 million sustainability term loan facility can be used for general corporate purposes, with the only conditions placed on the borrower to trigger a lower interest rate being that it remains listed in certain sustainability indices.

MAS subsidy schemes

Green and sustainability loan program

The GSLS is, in our view, the backbone of the MAS’s Green Finance Action Plan. The first of its kind in the world, the GSLS seeks to help businesses of all sizes obtain green and sustainable financing by covering the expenses of engaging independent service providers to validate the green and sustainable credentials of the loan. MAS will cover up to S $ 100,000 of these expenses per loan.

The GSLS also encourages banks to develop green and sustainability-linked lending frameworks to make this financing more accessible to small and medium-sized enterprises (SMEs). SMEs will not need to develop their own frameworks before applying for sustainable funding to show that the funds will be deployed in accordance with internationally recognized green standards.

Given the relatively modest grant amount for borrowers, we believe that the GSLS is not likely to significantly factor into the decision of whether or not to use green and / or sustainable financing in the minds of large corporations. borrowers. These borrowers tend to focus on business needs and requirements, loan pricing, CSG and ESG concerns; the GSLS will probably be the icing on the cake.

When implementing the GSLS, the MAS, in our opinion, probably had the borrowing SME more in mind. This makes sense when you consider that SMEs are the economic backbone of most, if not all, ASEAN countries. Changing the region’s economic development towards more sustainable production processes and consumption patterns is only possible with the active contribution of SMEs. This contribution, however, depends to a large extent on their access to finance for investments in cleaner production technologies. Therefore, facilitating the access of SMEs to financial resources and in particular to green and sustainable financing becomes a real concern.

Sustainable bond grant program

The SBGS aims to encourage the issuance of green, social, sustainable and sustainability-linked bonds in Singapore and is open to new and recurring issuers. At the time of writing, MAS has indicated that the SBGS will be valid until May 31, 2023. MAS has defined a set of qualification criteria that potential eligible issuers (and issues) should meet (a summary non-exhaustive is presented below):

Assuming these eligibility criteria are met, MAS will bear the costs incurred with respect to the independent external review or scoring performed on the basis of the internationally recognized green / social / sustainable bond principles or framework. . There is a cap of S $ 100,000 or 100% of eligible expenses per eligible issue.

So far, the two sectors that have produced frequent issuers of green bonds are real estate and renewables. We expect this trend to continue in 2021, possibly with increased interest from issuers in the renewable energy sector. The Singapore government has announced that it is targeting 350 MWp of solar power by 2020 and 2 GWp by 2030, which represents around 4% of Singapore’s total electricity demand and is moving away from a heavy dependence on natural gas. There is therefore a strong potential for other issuers in this sector to issue green bonds to finance their operations in order to meet demand.

Look ahead

Singapore is emerging as a regional leader in green and sustainable lending. With new momentum from MAS in the form of GSLS and SBGS, we expect the green and sustainable finance market to accelerate in 2021 and hopefully beyond.