16 August 2024

What is Green Finance & Why do Corporations Invest in it? (2024)

Tackling climate change requires a necessary but monumental shift towards a sustainable economy. Green finance steps in as a driving force, leveraging private sector capital and financial markets to fuel the transition to a low-carbon economy.

For businesses, embracing green finance is not just about environmental responsibility; it is a strategic move. Through sustainable investments, companies can tap into government initiatives, appeal to investors, and future-proof their operations in a world increasingly focused on sustainability. Green finance thus presents a win-win scenario, driving the economy towards sustainable development goals and helping businesses achieve long-term success. 
 

Key Takeaways

• Green finance refers to financial products, services, and investments that drive the transition to a low-carbon economy.
   
• Singapore is rapidly becoming a central hub for green finance in Asia, with a strong emphasis on sustainable solutions that encourage businesses to adopt green finance practices.
   
• Investors increasingly prioritise ESG factors and seek companies that are committed to sustainable practices, making green finance a key factor in attracting capital investments.
   
• Green finance provides smaller companies within supply chains with better access to funding and improved bargaining power.

What is Green Finance?

Green finance refers to financial products, services, and investments that drive positive environmental outcomes and contribute to a sustainable, low-carbon economy. This includes green, social, sustainable, and sustainability-linked options, primarily for corporate and commercial customers.

Singapore is taking the lead in Asia's green finance movement, with sustainable initiatives like the US$2 billion Green Investments Programme and issuing up to $35 billion in green bonds to set a precedent for corporate green bonds. These efforts are now extending beyond government initiatives, as corporations have also begun to explore green finance options that align with national goals—let us explore why.
 

Why are Corporations & Enterprises Investing in Green Finance today?

1. Potential Incentives & Support from the Government

Apart from spearheading green initiatives within the public sector, the Monetary Authority of Singapore (MAS) has also put in place support structures to encourage businesses to adopt green finance practices.

For example, when it comes to green trade and capital, the government understands the need for short-term working capital for the supplier and buyer along the value chain. Some potential initiatives discussed are tax incentives such as longer tax holidays or higher preferential tax rates, and awarding carbon/green credits that can potentially be monetised on public exchanges.

For companies with a higher reliance on fossil fuels, Singapore has proposed transition finance incentives such as defrayed costs of engaging consultants for technical reviews and regular periodic audits, as well as tax incentives for the use of approved new technologies to facilitate the transition towards green projects (e.g. renewable energy, more sustainable use of natural resources).

On top of these incentives, Singapore has proposed other targeted solutions for individual industries and sectors such as real estate, infrastructure, fund management, oil & gas, shipping, etc. to encourage businesses to participate in the move towards environmental sustainability in Singapore.
 

2. Greater Appeal to Investors

Institutional investors are increasingly incorporating ESG factors, including green investments, into their strategic asset allocation decisions. They are drawn to companies embracing green finance, as it signifies a commitment to long-term viability and responsiveness to stakeholder demands, including consumers, bondholders, and regulators.

However, they are also wary about greenwashing. Greenwashing refers to the practice of misleading consumers and investors by exaggerating or misrepresenting a company's environmental efforts. Fuelled by concerns about greenwashing, a significant majority of investors (94%) believe that sustainability reports include some level of exaggeration or unsupported claims, a jump from 87% last year. In fact, nearly 8 in 10 investors (79%) feel that unsupported claims in sustainability reports are present to a moderate or significant extent. 

Thus, as investors become increasingly more green-savvy, companies that engage in legitimate green and sustainable finance solutions would have an edge over those that choose to merely greenwash their brand. 
 

3. Stronger Bargaining Power for SMEs

For small and medium-sized enterprises (SMEs) that are part of a larger supply chain, they often rely on a network of smaller, private suppliers and distributors, both upstream and downstream, who typically face financial constraints and limited bargaining power. 

Green supply chain finance makes it easier for SMEs to access funding by lowering the financial requirements they need to meet. For instance, imagine you are a small wholesale packaging supplier transitioning to eco-friendly products, the following example illustrates the benefits of green supply chain finance:

• Reduced Financing Thresholds: Previously, securing funding was challenging for your business, as financial institutions are hesitant to lend money to companies with limited assets. Now, these institutions are willing to offer guarantees for your eco-friendly packaging invoices as it has a positive sustainability impact. This helps to mitigate payment risk and you can also avoid higher interest rates from traditional loans.
   
• Better Bargaining Power: As a result, you have more leverage to negotiate and build stronger relationships with larger companies because you are not dependent on their sole funding. You can focus on quality and sustainability without worrying about financial constraints.

This approach makes it easier for businesses, especially smaller ones, to play a role in the green transition and contribute to a more sustainable future.
 

Charting A Sustainable Future: Green Financing for Every Business

Green financing is a transformative power, which drives sustainable growth and development across industries. It empowers businesses, particularly SMEs, to adopt environmentally responsible practices while ensuring long-term financial viability.

As the green finance landscape continues to evolve in Singapore, RHB will remain committed to supporting government initiatives and partnering with SMEs to foster innovation, collaboration, and ultimately, a more sustainable future for all.
 

The information presented in this article is accurate as of date of publication.