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August 25, 2022

Why Singapore’s financial watchdog is backing transition finance

The Monetary Authority of Singapore is calling on the financial sector to provide funding for the low-carbon transition, raising the question of whether such support will kick-start the transition bond market there. Capital Monitor spoke to MAS chief sustainability officer Darian McBain.

By Adrian Murdoch

transition finance, Singapore
Darian McBain of the Monetary Authority of Singapore says the prospect of transition in Asia is very different from that in Europe. (Photo courtesy of MAS)
  • The Monetary Authority of Singapore (MAS) has been voicing its support for transition financing and urging the finance sector to play its part.
  • Transition finance in Singapore has so far largely comprised loans, with not a single transition bond issued there.  
  • With government backing, transition bonds have taken off in China and Japan this year, with those two markets accounting for the vast bulk of global issuance.

How to raise and deploy the capital needed to finance the transition to a low-carbon economy is a challenge at the front of many policymakers’ minds these days – not least in Singapore, where the central bank and markets watchdog has been urging the financial sector to play its part.

At the launch of the Monetary Authority of Singapore’s (MAS) sustainability report on 28 July, managing director Ravi Menon 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.”

After all, an estimated $200bn a year of green investment until 2030 will be needed for the Asean to have any chance of achieving the UN Sustainable Development Goals.

What’s more, the transition is a very different prospect in Asia than in Europe, given how the latter is at a more advanced stage of economic development, Darian McBain, the MAS’s chief sustainability officer, tells Capital Monitor: “Asia has to develop pathways that will suit Asia and suit the population.”

The region must deal not only with climate change but also with “the green revolution” – the societal change that will accompany it – says McBain, who was appointed in October last year to coordinate the MAS’s green finance and sustainability agenda. This will require vast amounts of capital and re-engineering of a great number of both businesses and supply chains.

The fossil fuel dilemma

McBain acknowledges the huge pressure to ditch fossil fuels as sources of power, but tells Capital Monitor: “I don’t think the answer is going to be just to pull funding from carbon-intensive industries. We know that we can’t just switch [coal-fired power stations] off. We also know that we can’t continue as we are.”

Last year, Asia-Pacific accounted for 52% of global carbon emissions, according to BP’s ‘Statistical Review of World Energy’, published in November, while coal accounted for 55% and 57% of the energy mix in China and India, respectively, according to

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“The question is how to flow funding into those [fossil fuel] industries to enable them to meet the requirements of a science-based 1.5°C pathway,” says McBain, referring to the trajectory required to meet the goals of the 2015 Paris Agreement.

There is no single answer, McBain argues. As a case in point, she cites the Asian Development Bank’s push for public-private partnerships and the Energy Transition Mechanism to accelerate the transition from fossil fuels to clean energy – something that she says the MAS has also been looking at.

The regulator has been working on other actions to support the transition, including: Project Greenprint, a programme announced in November last year to help the financial sector’s need for robust sustainability data; mandating climate-related financial disclosures for asset managers; and working with the Singapore Exchange (SGX) to develop a portal and platform via which companies can report sustainability data.

McBain sees it as MAS’s role to make sure that market participants have the tools that they need to help with the transition: “Do we need to pull in different participants? Do we need better engagement with the UN? Do we need to work more with the accounting firms on how they are going to be assessing [sustainability] data?”

Transition bonds lacking traction

However, as has largely been the case elsewhere, one of the most obvious tools of transition finance – transition bonds – have struggled to take off in Singapore, which has not seen one issued as yet.

Developed by France’s Axa Investment Managers with Crédit Agricole in November 2019, transition bonds do not require the issuer or the project to be labelled as green, but proceeds are used to fund a company’s transition towards having a lower environmental impact and reducing its carbon emissions.

Part of the reluctance to engage with the structure has been investor caution, with concerns being cited such as a lack of clear standards and that these instruments simply allow banks to continue with ‘business as usual’.

Issuance has been rising but remains minimal, standing at $4.4bn across 12 bonds from nine issuers last year, up from $585m in 2019, amounting to total global sales of $9.6bn, according to the Climate Bonds Initiative. Issuance has been global, predominantly coming from multilateral institutions as well as corporates based in France, Britain and Hong Kong.

But there is a sense that some markets are waking up to the structure, with more issuers looking at them than in the past. China and Japan are recent new hotspots, with the vast bulk of the $2.1bn of transition bond issuance globally in the first half of this year coming from those two countries (see chart below).

In both cases, there has been support for transition bonds from the government. On 19 May, Japanese prime minister Fumio Kishida said the government expected to sell ¥20trn ($157bn) worth of transition bonds over the next 20 years to help the country achieve carbon neutrality by 2050.

And in early June, China’s National Association of Financial Market Institutional Investors said it was encouraging transition bonds in sectors such as power, construction and aviation, to help the country meet its carbon-neutrality targets by 2060.

According to its documentation, Mitsubishi Heavy Industries, the engineering arm of Japan’s Mitsubishi Group, plans to issue in the near future a ¥10bn ($72.8m) five-year transition bond to help it decarbonise its factories.

Inclined towards loans

Whether the MAS’s public support for transition finance will kick-start transition bond issuance there is another matter. In Singapore, such funding has tended come in the form of loans. The preference for some may be to keep such financing transactions private, given the sensitivities involved.

One banker described transition finance as like “trying to find a pathway through the minefield”, referring to the difficulties of managing the reputational risk of helping companies that are big emitters.

Nonetheless, “transition is a huge priority in terms of getting away from fossil fuels into renewables”, says a Singapore-based director of ESG at one of the European banks.

In April, for example, DBS – the largest Singaporean lender – signed off on a $27.5m loan facility to help Indonesian energy group Indika Energy develop biomass fuels. A month later, the bank agreed a $22.1m-equivalent transition loan with an Indian subsidiary of Singapore-based agribusiness major Wilmar International to expand its bioethanol production capacity.

But such deals represent only a small part of overall demand for funding, says the global head of sustainability at a Singaporean bank. While he might like to focus solely on sustainable activities, he says, renewable energy and green buildings are not “a significant portion of the real economy”.

Another banker says that if she refused to provide financing to companies in carbon-intensive sectors, they would either raise private capital (“which will be impossible to regulate”) or could be nationalised, where it would be “impossible to engage in influence”.

Nonetheless, there appear to be red lines for lenders.

“You can’t see a long-term future where coal-fired power plants are a viable asset,” says the chief sustainability officer of one Singaporean bank. “Aside from the fact that it screams ‘stranded asset’, from a reputational perspective it’s a death knell for a bank to touch them.”

But other carbon-intensive companies might now have more luck raising capital via transition bonds in Singapore as they gain acceptance in other markets.

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