(Bloomberg) — Singapore’s financial watchdog is turning to regulation and technology to tackle so-called “greenwashing,” which it considers the weakest link in the push to expanding sustainable finance.
Banks in Singapore will have to undergo stress tests from next year while making regulatory disclosures to ensure they’re managing risks related to climate change and other environmental issues, Ravi Menon, managing director of the Monetary Authority of Singapore, said in an interview. Data verification using technology that can attest to the provenance of green products will also be required, he added.
Menon said the potential for greenwashing is on the rise as more funds are allocated for sustainability projects. Stocks and funds highly rated on environmental, social and governance metrics have attracted trillions of dollars of investments in recent years.
The introduction of stress tests means banks will have to get a better handle on the climate risks tied to their borrowers, their customers and supply chains, said Menon, who also heads the city-state’s central bank. “That will increasingly become a supervisory expectation,” he said.
Singapore launched a national program that will use artificial intelligence to help with risk analysis for the financial industry at its annual fintech festival Monday. Part of the program is a partnership between local lenders and fintech firms to assess companies’ environmental impact and identify emerging environmental risks, as well as check against greenwashing, Deputy Prime Minister Heng Swee Keat said at the event.
The MAS is joining other central banks in the U.K., Europe and Canada in putting their financial institutions through assessments that scrutinize the impact of climate change on everything from real estate to corporate loans.
Starting next year, all listed firms in Singapore, including banks, will need to publicize information in line with recommendations from the Group of 20’s task force on climate-related financial disclosures. Mandatory disclosure will also extend to ESG fund products sold to retail investors, Menon said.
In Europe, the flow of cash into ESG funds picked up last quarter following the introduction of new disclosure requirements to help restore confidence in a market hit by greenwashing accusations. The ESG market has been dogged by allegations of inflated and even false claims about the benefits that investments bring. The EU adopted in March what’s known as SFDR, for Sustainable Finance Disclosure Regulation, an historic measure that’s setting the pace for global requirements.
In line with major global banks, lenders in Singapore have started to reduce their exposure to some of the industries linked to climate change, such as coal. DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. and United Overseas Bank Ltd., the three major Singapore banks that are also the largest in Southeast Asia by assets, pledged to stop financing new coal-fired power projects, honoring only previously committed ones.
Many emerging economies in the region such as Vietnam and Indonesia still rely on coal, considered the world’s dirtiest fuel. Palm oil is another major industry in Southeast Asia often linked to deforestation and haze.
Asked whether the MAS would ask local banks to curb their financing for palm oil-related activities, Menon said the regulator never makes pronouncements on any particular sector.
“These are issues we study closely,” Menon said. “You don’t want to rush to say ‘this activity is brown, and you should not invest in it, or you should not make loans to finance it’.”
People need to be given “greener alternatives” to whatever they’re doing that isn’t so environmentally friendly, Menon said. Banks can offer financing that helps the industry transition to a replacement of palm, if and when there is one, he said.
“So if in five or 10 years’ time, the way in which palm oil cultivation is done is reformed, then the lenders need to pay more attention to it,” he said, adding they can work with borrowers to improve the way it’s harvested to minimize deforestation.
(Adds new AI-based program for risk assessment in fifth paragraph.)
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