Recent global developments have highlighted the increasing significance of Environmental, Social and Governance (ESG) considerations for organisations. Regulators, lenders, shareholders, investors and other stakeholders are increasingly demanding that companies deliver positive sustainability outcomes, accompanied by accurate and regular reporting.
In this regard, financial institutions play a crucial role in reducing climate change and achieving ESG targets by catalysing capital flows to sustainable projects and by influencing changes in clients’ businesses through financial incentives.
As a leading international financial centre in Asia, Singapore has committed to supporting Asia’s sustainable transition, and is actively promoting a robust sustainable finance ecosystem in Singapore to serve the region.[i]
This article will discuss the key regulatory frameworks and incentive schemes that have been adopted in Singapore to achieve this aim.
Mandatory sustainability reporting for SGX-listed issuers
Since 2017, issuers listed on the Singapore Exchange (SGX) have been required to publish, on a ‘comply or explain’ basis, an annual sustainability report to foster greater transparency towards investors in key sustainability issues across listed companies.[ii] Key requirements include:[iii]
1. Selecting a suitable sustainability reporting framework;
2. Identifying material ESG factors relevant to its business; and
3. Setting out sustainability policies, practices, performance and targets in relation to these material ESG factors.
In 2022, the SGX bolstered the annual sustainability disclosure requirements to mandate specific climate-related disclosures for all SGX-listed issuers. In this regard, the SGX has implemented an incremental approach in ramping up climate disclosure requirements to prepare issuers to eventually report against the International Sustainability Standards Board (ISSB) standards, which are expected to be finalised later this year. The key “phases” for such reporting are set out below:[iv]
1. From 2022, all issuers are required to provide climate reporting on a ‘comply or explain’ basis.
2. From 2023, climate reporting is mandatory for issuers in specified sectors.[v]
3. From 2024 and beyond, climate reporting will be mandatory for issuers in more specified sectors.[vi]
The “comply or explain” approach requires companies to describe their practices in relation to each principle and/or guideline. Where the issuer excludes any component, it must disclose this and describe what it does instead, with reasons for doing so.[vii]
In order to facilitate consistent ESG disclosures across issuers, the MAS and SGX in September 2022 launched ESGenome, a disclosure portal to allow investors to access ESG related data and information as reported by issuers, in accordance with aligned metrics.[viii]
MAS Guidelines on Environmental Risk Management
In 2020, the Monetary Authority of Singapore (MAS) issued a set of Guidelines on Environmental Risk Management (ERM Guidelines) requiring banks, asset managers, and insurers to implement certain risk management practices and provide regular disclosures in relation to environmental risks faced by these financial institutions. Under the ERM Guidelines —
1. In terms of governance, boards and senior management of FIs are expected to incorporate environmental considerations into their strategies, business plans, and product offerings, and maintain effective oversight of the management of environmental risk.
2. In terms of risk management, FIs should put in place policies and processes to assess, monitor, and manage environmental risk.
3. In terms of disclosure, FIs should make regular and meaningful disclosure of their environmental risks, so as to enhance market discipline by investors.
Building on MAS’s Guidelines, the Green Finance Industry Taskforce (GFIT) published a set of recommended and best practices in its Handbook on Implementing Environmental Risk Management (ERM Handbook) in January 2021. The ERM Handbook contains best practices to complement the ERM Guidelines described above, and cites, amongst other things, recommendations from the Task Force on Climate-Related Financial Disclosures to improve the quality of reporting of climate-related financial information.
MAS Circular on Disclosure and Reporting Guidelines for Retail ESG Funds
The MAS Circular on Disclosure and Reporting Guidelines for Retail ESG Funds (Retail ESG Fund Circular) was introduced to mitigate the risks of greenwashing[ix] and help retail investors better understand the ESG funds they invest in.[x] The Retail ESG Fund Circular applies to all ESG funds seeking authorisation or recognition from 1 January 2023 onwards.[xi]
The Retail ESG Fund Circular requires certain criteria to be met if a fund uses ESG-related terms in its name. Such funds must reflect a substantial ESG focus in its investment portfolio and/or strategy, and in this regard, at least two-thirds of the fund’s net asset value must be invested in accordance with the fund’s ESG investment strategy.[xii]
Existing funds that have ESG-related terms in their names or represent themselves as ESG-focused schemes but do not comply with the Retail ESG Fund Circular will be required to change their names or be represented by another name when the funds are offered to investors in Singapore.[xiii]
Additionally, in both the fund’s prospectus as well as subsequent annual reports, certain information must be disclosed to investors, including details on the ESG fund’s investment strategy, criteria and metrics used to select investments, and the extent to which the fund’s ESG focus has been met.
ABS Guidelines on Responsible Financing
In October 2015, the Association of Banks in Singapore (ABS) issued Guidelines on Responsible Financing[xiv] which define the minimum standards on responsible financing practices to be integrated into its members’ business models.
The ABS Guidelines on Responsible Financing sets out three key principles for responsible financing for banks –
1. Disclosure of Senior Management’s Commitment to Responsible Financing – Banks must publish their management position and organisation support, as well as their chairman or CEO’s commitment to support and implement responsible financing through a framework.
2. Governance on Responsible Financing – Banks must allocate resources to responsible financing. They must implement governance and internal controls for responsible financing by (i) having a separate set of responsible financing policies and procedures, or (ii) embedding responsible financing practices into their existing policies and procedures.
3. Capacity Building on Responsible Financing – Banks must raise staff awareness of ESG values and build management capacity for responsible financing.
The MAS has launched a number of schemes to encourage the use and development of sustainable financing instruments. These include:
1. MAS Sustainable Bond Grant Scheme (SBGS)[xv] – Launched in 2017, the SBGS seeks to "support the issuance of green bonds in Singapore, by defraying the additional costs of verifying green, sustainability and sustainability-linked bonds as compared to conventional bonds while promoting the adoption of internally accepted standards. The SBGS offsets up to S$100,000 of expenses incurred for external reviews of eligible green, social, sustainability and sustainability-linked bonds.
2. MAS Green and Sustainability-Linked Loan Grant Scheme (GSLS)[xvi] – The first of its kind globally, the GSLS was launched in November 2020 to encourage companies to take up green and sustainability-linked loans in Singapore, and offsets up to S$100,000 per loan over a 3-year period in costs incurred in engaging sustainability advisory and assessment service providers.
3. Green Investments Programme (GIP)[xvii] – In 2019, the MAS announced its US$2 billion GIP to invest in public market investment strategies that have a strong green focus. The GIP aims to foster the growth of a strong and diverse ecosystem of green financing capabilities in Singapore. As of March 2022, the MAS has fully funded a group of five externally-managed mandates amounting to US$1.8 billion under the GIP, allowing asset managers to drive regional green efforts from Singapore.
4. Asia Climate Solutions Design Grant[xviii] – In November 2022, the MAS contributed to a S$5 million Asia Climate Solutions Design Grant to fund early stage projects in blended finance solutions.
Moving Forward – Tackling Greenwashing
In the face of increased investor scrutiny, building the credibility of “green” or sustainable financial products is essential for the growth of a sustainable finance ecosystem. To address this, regulators and the financial industry will need to continue to find ways to tackle the risk of greenwashing.
In this respect, the MAS has said that it will step up disclosure requirements for all financial institutions over the next few years by introducing mandatory sustainability disclosure requirements. This is slated to be developed once the baseline sustainability reporting standard has been published by the ISSB. Establishing a standardised framework for ESG disclosures will be an important step towards minimising the greenwashing risks as it provides a consistent, comparable and reliable set of sustainability disclosures across industries.
In Singapore, the MAS has largely focused on the adoption of global disclosure standards and mandating sustainability and climate disclosures. In line with global trends, we expect more to be done to address the challenges of minimising greenwashing risks. This may include:
1. Imposing clear metrics and definitions on how certain sustainability-related terms – such as “ESG”, “green”, or “sustainable” – may be used for marketing and disclosure purposes in funds targeted at both retail and sophisticated investors.
2. Defining tiers of ESG fund types depending on the extent that the funds advertise or utilise ESG factors in investment strategy, such that investors understand to what extent their investments are ESG-friendly and what their investments are going toward.
3. Adopting a general anti-greenwashing prohibition applicable to all financial institutions to reinforce existing requirements that information be clear, fair and not misleading.
Regulators must balance the concern of capital flows going towards investments and companies that do not live up to their ESG promises against being overly prescriptive, at the risk of unnecessarily increasing costs faced by companies and investors, and given the constantly evolving sustainable finance space.
Nevertheless, ensuring that ESG taxonomies are well-defined and consistent across jurisdictions is expected to be a crucial next step for Singapore to cement itself as a leader in sustainable finance in the region and beyond.
The authors would like to thank Michelle Chiam and Priscilla Seah, Associates at Allen & Gledhill LLP, for their assistance in the production of this article.
[ii] Rule 711A and 711B of the SGX Listing Rules.
[iii] Please see Practice Note 7.6 – Sustainability Reporting Guide issued by the SGX on 20 July 2016 and last amended on 1 January 2022.
[v] The specified sectors consist of the (i) financial services; (ii) energy, and (iii) agriculture, food and forest products from FY2023.
[vi] The specified sectors consist of the (i) materials and buildings; and (ii) transportation industries from FY2024.
[vii] Rule 711B(2) of the SGX Listing Rules.
[ix] Greenwashing refers to the act of marketing or representing that products or investments to be more sustainable or “green” than they actually are.
[x] Please see https://www.mas.gov.sg/-/media/mas/regulations-and-financial-stability/regulations-guidance-and-licensing/securities-futures-and-fund-management/regulations-guidance-and-licensing/circulars/cfc-02-2022-disclosure-and-reporting-guidelines-for-retail-esg-funds.pdf.
[xi] FAQs on CFC 02/2022 Disclosure and Reporting Guidelines for Retail ESG Funds (Circular) (FAQs on Retail ESG Fund Circular) at A7.
[xii] FAQs on Retail ESG Fund Circular at A4.
[xiii] FAQs on Retail ESG Fund Circular at A3.
[xiv] Please see https://abs.org.sg/docs/library/responsible-finance-guidelines-version-1-1.pdf, first issued 8 October 2015, updated June 2018.
Adrian is a Partner in the Financial Services Department and is Co-Head of both the Firm’s FinTech Practice as well as its ESG & Public Policy Practice. Adrian’s practice encompasses advising clients on regulatory matters affecting the financial services industry including, licensing matters, the setting up of payment services, the distribution of financial products, outsourcing arrangements and conduct of business requirements. Adrian has been active in the FinTech sphere, being involved in contributing to policy formation and the enactment of FinTech related legislation. Adrian has advised on a variety of FinTech models including payment systems, equity and debt crowdfunding platforms, P2P lending platforms, online lending intermediary based platforms, online money transfer systems, robo-advisors, virtual stored value facility providers, initial coin offering structures, security token exchanges, digital payment token exchanges and the sale of non-fungible tokens (NFTs). He was also appointed as an EXCO member of the Singapore FinTech Association (SFA), and is the only lawyer in private practice on the SFA EXCO. In the sphere of public policy, Adrian has assisted with the consideration and roll-out of new policies affecting the financial industry and is frequently involved in the coordination and provision of industry views on policy and regulatory matters in relation to both private and public consultations.
Elsa is Co-Head of Allen & Gledhill’s ESG & Public Policy Practice and is Regional Co-Head of its Competition & Antitrust Practice. Her ESG and public policy experience ranges from assisting clients to map out ESG trends and implications, policy drafting, advocacy, and assisting on legislative changes. As Regional Co-Head of the Competition & Antitrust Practice, Elsa also advises clients on the antitrust, consumer protection and public policy aspects of ESG matters, including collaboration agreements, merger control, and greenwashing claims.