ONCE an unfamiliar concept for many, sustainable finance has become a movement that has been gaining traction around the world.
Last September, the World Federation of Development Financing Institutions (WFDFI) formally launched the Global Sustainable Finance Network (GSFN), a voluntary membership-based global initiative that aims to bring together financial institutions and other stakeholders committed to the advancement of sustainable finance.
Asian banks are also starting to incorporate the concept of sustainability into their businesses, according to the World Bank's investment arm, International Finance Corporation (IFC).
The IFC has worked with the Chinese government to promote green credit policies that require banks to comply with environmental and social guidelines. It is now in talks with Singapore's sovereign wealth fund, Government of Singapore Investment Corporation (GIC), to set up a US$1 billion infrastructure fund to provide equity investments in infrastructure projects in emerging markets.
"A lot can be said about how a business plans to move forward with stellar growth rates and leading-edge innovation," said Mark Devadason, group head of Sustainability and Regions at Standard Chartered Bank. "But if progress comes at the expense of accountability and long-term positive impact on the economy, environment, people and society, what good is it to anyone in the long term?"
Bruce Schlein, head of Global Corporate Sustainability at Citi, notes that sustainability is gaining momentum as seen in the growth in clean energy investments and financing, and the number of financial institutions subscribing to common environmental and social risk diligence such as the Equator Principles.
"While the traction is not equal across markets and dependent - in large part - on policy, public and private sector clients are increasingly seeking financing solutions designed to help them meet their sustainability objectives," he observes.
Singapore Compact, a national society that seeks to push the corporate social responsibility (CSR) movement forward, defines sustainable finance as the provision of financial capital and risk management products and services in ways that promote or do not harm economic prosperity, the ecology and community well-being.
Thomas Thomas, executive director of Singapore Compact, notes that some 1,066 signatories have pledged support for the Principles for Responsible Investment - and this number will increase over the next few years.
The Equator Principles (EPs), a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing that was started in 2003, now has 67 institutes around the world that have adopted it, he points out. "Post-Lehman crisis, the various global initiatives for responsible finance have taken an added importance," Mr Thomas says.
The increased awareness among senior finance professionals in sustainable finance is reflected in a global survey of 208 chief financial officers undertaken by Verdantix on behalf of Deloitte.
A large majority of them are aware that sustainability will profoundly affect their "mainstream" duties. Many are actively managing sustainability risks and gearing up for capital investments with sustainability in mind, as well as communicating their sustainability performance to key observers.
Many of the chief financial officers (CFOs) surveyed are "meaningfully engaged with sustainability", with more than 70 per cent of them expecting sustainability to have an impact on compliance and risk management; and more than 60 per cent foresee changes to functions such as financial auditing and reporting. Nearly half the CFOs surveyed are planning capital investments that will support the implementation of sustainability initiatives.
Mr Schlein points out that sustainable finance can take as many forms as finance itself. "From municipal bonds for energy efficiency programmes to micro-finance loans for solar-powered cooking stoves, and from structured finance for utility scale wind farms to commodities trading for carbon offsets, sustainable finance has helped Citi and its clients to advance shared environmental and social objectives," he says.
One way for the finance teams or CFOs of companies to incorporate sustainability in their work is to move towards sustainability reporting to cover the company's economic, environmental and social performance, adds Mr Thomas. The most widely used sustainability reporting guidelines so far are those produced by the Global Reporting Initiative (GRI).
Stock exchanges in Asia, such as those in Singapore and Shanghai, have already been promoting sustainability reporting. The Singapore Exchange has introduced guidelines on sustainability reporting for listed companies while the Shanghai Stock Exchange requires some of its listed companies to disclose annual social responsibility reports and internal control self-assessment reports.
A differentiating factor
Several banks have also recognised how sustainable finance makes them them stand out from the crowd, and are increasingly aware of the positive impact that they can make in the economy and the communities that they serve.
Standard Chartered is one bank where sustainable finance has penetrated into the way that it conducts its business. It has a long list of sustainable finance initiatives ranging from improving access to finance for the poor to funding green industries, helping small businesses grow, and protecting the environment.
To help the poor gain access to finance, Standard Chartered is working with development organisations like the IFC to help micro-finance institutions mitigate risk and provide technical assistance. Mr Devadason explains that Standard Chartered also adheres to an environmental and social (E&S) risk policy to govern its lending activities and has enhanced its credit policy for small and medium-sized enterprises (SMEs).
And to ensure continued investments in agriculture, Standard Chartered supplies structured agri-finance in Africa using farmers' commodities as collateral rather than traditional fixed assets. This helps to free up their physical assets for additional financing ventures.
"Despite a challenging economic backdrop, we continued to finance all segments of the renewable energy market including wind, solar, geothermal and biofuels," Mr Devadason says. Last year, Standard Chartered led two finance deals worth US$200 million to support wind power projects in India, resulting in significant carbon savings of 721,800 tonnes per annum. It also played a key role in the initial public offering of Chinese wind farm operator Huaneng Renewables Corporation with a US$50 million investment.
"Through sustainable finance, improving access to finance and empowering our communities, we create more value than the profits we make," Mr Devadason says.
Standard Chartered has also made a clear stand on the kind of business that it will not do if the business is not in line with sustainable finance. Last year, it developed an exclusion list of products and services that it will not finance, such as commercial logging of primary forests, use of unsustainable driftnet fishing practices and businesses that use child labour.
For its efforts in sustainable finance, Standard Chartered was awarded the "Global Sustainable Bank of the Year" last month as part of the 2012 FT/IFC Sustainable Finance Awards organised by the Financial Times and IFC.
Similarly, Citi has integrated sustainability into the conduct of its business in four areas - operations; environmental and social risk management; business development opportunities; and employee engagement.
One defining feature of Citi's initiative is the integration of all four areas, says Mr Schlein. For instance, the risk management area helps Citi identify new opportunities, while the operations arena allows Citi to understand the actual issues of environmental impact and establish credibility with clients and stakeholders.
The other defining feature, Mr Schlein adds, is a commitment to engage stakeholders - which includes civil society, clients and government - to facilitate mutual exchanges of information and expertise to address issues and solve problems.
While Singapore banks appear to be lagging in their focus on sustainable finance, with a tendency to focus on corporate philanthropy and simple community projects, this appears to be changing.
In May this year, the Asian Development Bank (ADB) and the Singapore government signed a memorandum of understanding to strengthen cooperation in sharing knowledge, research and innovation, and project preparation and capacity development activities. The partnership will focus on three key areas of governance and public policy; private sector development; and infrastructure, urban development and climate change.
Mr Thomas notes that given that sustainable finance is a new and emerging area in Singapore, there is a lot to be done in the local landscape. He believes that banks in Singapore are making progress, with all major banks being members of the Singapore Compact for CSR.
"Banks are moving away from the traditional boundaries of philanthropic and charity aspects to embrace sustainability," he says. "There is an emergence of 'corporate citizenship' as a guiding principle where companies recognise that global corporate citizenship is essentially about how the company makes its profits, everywhere it operates not simply what it does with these profits afterwards."