Asian firms have become increasingly focussed on the adoption of green financing in recent years, not least because of the environmental risks faced by many countries in the region, as well as the transition risk and opportunity associated with global efforts to move away from fossil fuels.

As Prakash Arikrishnan, Director, Risk Advisory, Global Treasury Advisory at Deloitte points out, interest in green finance “is especially pronounced in regions that are either heavily impacted by environmental issues, or where there is a strong regulatory push towards sustainability.”

In addition to helping treasurers fulfill regulatory requirements and mitigate environmental risks, he added, the attractions of green financing also include “the financial incentives that often accompany sustainable investments.”

Sunil Veetil, Head of Commercial Banking Sustainability, Asia-Pacific, at HSBC, observed that the topic of sustainable finance is now raised in nearly every meeting with corporate treasurers. “Whereas in the past they would ask ‘why?’, nowadays they ask ‘how?’,” he added.

And governments are taking it seriously, for example on January 24, the Monetary Authority of Singapore (MAS) welcomed the new creation of the Singapore Sustainable Finance Association.

 

Addressing the Environmental Impact

Some sectors are embracing sustainable finance more rapidly than others. Alongside renewable energy, other notable adopters of green finance include manufacturing firms, as well as the automotive sector and property sectors.

Jason Teo, Head of Treasury, SEA at LOGOS Property, explained that the Apac logistics specialist continually strives “to address material, environmental, social and governance (ESG) impacts from our operations and provide ethical leadership for organizational growth and success.”

In 2020, LOGOS secured its maiden green development load with IFC (a member of World Bank Group) for two logistic assets in Indonesia.

But while certain sectors are more active in the sustainable finance space, Veetil noted that “there is a dawning realization among all businesses that decarbonization is a strategic pivot they must make and there are long-term advantages to reducing their direct and indirect emissions.”

 

Benefits Stack Up

There are numerous reasons for exploring green financing, from accessing additional investors to improving the company’s reputation. Cost savings are also a consideration: as Veetil observes, “Any good treasurer would want to shave basis points, and sustainability-linked facilities can offer better pricing when KPIs are met.”

That said, he added it has been encouraging to see that a growing number of companies “are proactively exploring green finances because of genuine business reasons.”

Compliance is another driver for adoption.

“Globally, governments and regulatory agencies   are increasingly enforcing policies that promote eco-friendly practices,” said Arikrishnan. “This encompasses incentives like tax benefits and subsidies, as well as penalties for non-compliance, rendering green financing a viable option for adhering to these policies while benefiting from these incentives.”

Other factors include pressures from investors and stakeholders, as well as the opportunity to tap into novel markets and opportunities.

“Sustainability is about creative value for our stakeholders and customers while supporting the communities in which we work,” commented Teo. With an increasing emphasis on procedures, standards and regulatory compliance, he said the alignment with international frameworks “will enhance investors’ confidence”, increasing access to factorable financing through green loans and bonds.

 

Terms and Conditions

When exploring green and sustainable finance, treasurers need to pay close attention to the types of terms and conditions that come with the territory.

Veetil explained that there are two main types of sustainable finance instruments, namely the use of proceeds and sustainability-linked instruments.

“In the former, the use of proceeds of the loan either reduces the borrower’s environmental footprint (green loans) or supports improved socio-economic conditions for a target population (social loans),” said Veetil. “This use is stipulated in the terms and conditions, and the client needs to prove that the funding is only being used for this green or social project.”

While sustainability-linked loans can be used for general corporate purposes, he notes that these transactions have KPIs that, if met, can cause margin to be lowered. “In some cases, if the KPI is not met, the margin increases,” he added, noting that the incentive-penalty mechanism must be clearly set out for sustainability-linked instruments, “and must comply with the LMA’s Sustainability Linked Loan principles.”

In addition, Arikrishnan observes that green loans usually require borrowers to provide regular reports on the use of funds and the environmental impact of projects being funded, with some loans requiring third-party certification or verification. Green loans may also include specific covenants or conditions that borrowers must adhere to, “such as maintaining certain environmental performance standards or complying with specific sustainability policies.”

As such, treasurers should be aware of the compliance requirements and increased reporting burden that comes with green finance, while also remaining alert to the risk of green washing, and the greater level of scrutiny over this topic.

 

Regulations Ramp Up

Looking ahead, Veetil predicts that increasing numbers of treasurers will be asking how – rather than if – sustainability is relevant to their businesses, and what actions they should be taking and prioritizing to meet their ESG goals, “especially on the back of disclosure updates in jurisdictions such as China and India.”

Likewise, treasurers will need to be aware of newly announced or adopted regulations, such as the EU Deforestation Law, Corporate Sustainable Due Diligence Directive and the Carbon Border Adjustment Mechanism (CBAM).

“The two themes of disclosure requirements and supply chain traceability will cause companies to take more actions to meet ESG targets, which in turn will lead to continued growth in sustainable finance in Asia in 2024,” Veetil noted.

“Our sustainable finance business experienced double-digit percentage growth in 2023 and we expect further growth in 2024.”

Delete’s Arikrishnan agreed that 2024 will see wider adoption and mainstreaming of the sector. At the same time, he expects the integration of digital and financial innovations like blockchain and AI “will enhance transparency, efficiency, and the ability to monitor environmental impacts.”

The scope of green projects will diversify beyond the current focus on renewable energy and energy efficiency with sectors such as sustainable agriculture, water management, and circular economy initiatives playing a more prominent role, Arikrishnan said.

He added that investor scrutiny on the actual environmental impact of green finance is also likely to heighten in the comping year, “paralleled by a growing interest in sustainable investments fulled by ethical considerations and the acknowledgment of the long-term value of sustainability.”

Corporate Treasurer

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