Delivered in Parliament on 12 January 2022
Mr Speaker, the process of moving from a carbon-based, “brown” economy toward a renewables-based, “green” economy is one of the major economic challenges of our time, not just for us, but for our children.
I agree that corporations have a crucial role to play in this transition, and that the state and civil society must be partners in the process. I believe, however, that the state must play a substantive leadership role, and my remarks will address various manners by which I believe it can do so, as it guides the private sector.
Before I proceed, I declare that I am the Chief Economist (Emeritus) of a wealth management advisory outfit, and occasionally speak on the topic of sustainable financing to audiences comprised of industry professional and potential investors.
Measuring natural capital
The celebrated management theorist Peter Drucker once famously quipped that, “What gets measured, gets managed.” Or, perhaps more pointedly in this case, what gets measured, gets treasured. Now, even if one disagrees with the sweeping premises of either claims, it is probably fair to acknowledge that objectives that are subject to measurement are more amenable to being targeted, whether in a practical or aspirational manner.
It makes inherent sense, therefore, for us to take more seriously the need to incorporate the concept of natural capital into our national income accounts. Lest I be accused of introducing yet another annoying definition of capital to this House, I will start by emphasizing that this concept is neither particularly novel—the term was introduced by German-British statistician E.F. Schumacher in 1973—nor especially controversial.
Simply put, natural capital refers to the stock of ecological assets—such as fertile soil, forested land, and coastal mangroves—from which we receive essential services, such as good harvests, clean air and water, and healthy fisheries. The term is now widely used across a number of disciplines—including anthropology, architecture, biology, geography, environmental science, economics, psychology, and sociology—and the Prime Minister’s Office (under the auspices of the National Research Foundation) has even supported an international collaborative project, entitled Natural Capital Singapore.
While the measurement of a concept that encompasses typically nonmarket ecosystem services—such as the richness of subsoil from which crops may be grown, the natural resources from which so much of modern communications technology is reliant on, the potential pharmaceutical innovations that could be discovered from a biodiverse forest, or even the cultural heritage we receive from understanding our embeddedness in our terrestrial, coastal, and marine ecosystems—is inherently challenging, such quantification is not impossible, and the past decades have seen enormous advances in our ability to value natural capital.
In 2006, the World Bank launched the first of its reports aimed at measuring this natural wealth of nations, and just last year, the institution released its latest report. Unsurprisingly, Singapore reports extremely low levels of natural capital. Of the $817,846 in per capita wealth, a miserly $62 was attributable to natural sources, both renewable and nonrenewable.
This should, perhaps, be unsurprising, given our surfeit in natural endowments. But importantly, all of this accrues to renewable sources, which suggests that such capital can be protected—and perhaps even expanded—should we choose to do so.
The vital need for us to preserve the little that remains of our forests, offshore fisheries, coastal mangroves, and protected land—rather than to raze it all on the altar of urban development—is underscored by the recognition that we receive enormous benefits from natural capital, because properly accounting for natural capital alongside reproducible capital makes it clear that the former is a nontrivial contributor to the observed differences in the economic performance of rich relative to poor countries.
Further developing green financing
All nascent financial markets—and especially those in fixed income—benefit from the presence of a clear, trustworthy benchmark. That benchmark, more often than not, comes in the form of a government issuance.
To be clear, the government has been proactive in its efforts to encourage the development of green bonds. The Ministry of Finance established a Green Bonds Program Office in September. A month prior, the National Environmental Agency (NEA) became the first statutory board to issue medium-term notes under its Green Bond Framework.
These initiatives are important, and I hope that the government will continue to look for opportunities to further catalyze sustainable investment efforts. In particular, I am hopeful that all government agencies will look for opportunities to weave green financing elements into their capital expenditure projects, and to fund these green components proportionately. This will ensure that administrators have strong incentives to conceptualize projects with sustainability considerations in mind—the stated goal of the 2030 Green Plan—since additional financing pools may avail themselves when they do so.
Moreover, I hope that the public-private partnerships (PPP) in green bond issuance goes beyond coinvestment in debt financing platforms—the current state of play—to entail actual green development projects, especially in infrastructure, as well as equity contributions and loan guarantees issued by government developmental financing vehicles. This is truly where the strength of PPPs come into play. To this end, I wonder if existing SINGA bonds will enfold green elements as well, and if so, whether this may mean a further expansion of the SINGA-related debt ceiling. And if there are plans for MAS’ Green Investments Programme to also include credit guarantees.
More fundamentally, we must not expect sustainable financing to be a silver bullet that will, in and of itself, be sufficient for our efforts to resolve climate change. The estimated $500 billion in green bonds issued worldwide in 2021 is only a miniscule 0.4 percent of the $119 trillion global fixed income market. Our focus must remain on resolving environmental and climate change issues by dedicating real government resources toward the emergency, rather than expecting financial markets to ride to the rescue.
Guarding against superficial efforts and greenwashing
Through all this, we should avoid the temptation to satisfy ourselves with feel-good actions that amount to little, insofar as their genuine environmental impact is concerned. The current affinity (some would call obsession) for environmental, social, and governance—commonly referred to as ESG—investments is a case in point.
The most common refrain seen in marketing materials for ESG is that by investing according to such criteria, one could “do well while doing good.” This siren call is especially attractive to younger generations of investors, who both understand the critical import of long-term environmental sustainability, while simultaneously holding a deeply-felt desire to grow their money in a manner consistent with their conscience.
Yet the promise of many ESG funds may well be a chimera. Not only do most ESG funds currently underperform a more mainstream index, many are expected to do so in future. Skepticism about the asset class is building, with at least one former ESG evangelist calling it a “dangerous placebo,” while other observers fear that climate finance is now a financial bubble. Some fearing that climate finance Perhaps more critically, the underperformance of ESG relative to non-ESG investments is precisely the point. The converse of lower expected returns to green corporations is that brown corporations face higher costs of capital. And when capital is more expensive, these firms are likely to grow slower and, by extension, pollute less.
On the corporate front, we should likewise guard against claims by firms that proclaim environmental objectives but are only doing so for the veneer of sustainability. While it is impossible to perfectly police such “greenwashing” attempts, government should not be complicit in lending a stamp of approval to firms that are simply pronouncing adherence to such standards for the purposes of going through the motions or, worse, marketing reasons.
As an example, consider one of the more egregious examples of greenwashing, involving carbon offsets. In 2019, a ProPublica report examined the market for carbon offset credit—the idea that firms would purchase carbon sinks such as trees to counter the pollution they would be creating—and concluded that most programs, while not always blatantly fraudulent in that they would actually set aside forest land, nevertheless contravened the ultimate purpose of the scheme, since a large majority of the projects involved forests that were either already protected or would never have been cleared anyhow. The report concludes that our “hunger for these offsets is blinding us to the mounting pile of evidence that they haven’t—and won’t—deliver the climate benefit they promise” and that “carbon credits for forest preservation may be worse than nothing.”
As another example, consider our current, single-stream recycling program. While this approach surely encourages many to adopt a recycling habit, reports suggest that awareness over recycling best practices remain low. The routine disposal of nonrecyclable materials in our blue bins—such as styrofoam or plastic bags—is, I am certain, commonly observed by members of this House during their estate walks. At best, this creates additional work for the conservancy contractors and at the sorting center; at worst, the contamination by food and liquid waste renders an estimated 40 percent of recyclables unusable. Further downstream, the practice of exporting recyclable waste runs the risk—as demonstrated by the Chinese treatment of most imported recyclables—of simply being redirected to foreign landfills. As of 2019, we continue to export a third of our recyclables, to an uncertain consummation.
As a third example, consider the booming market for sustainability bonds worldwide. Even as we enter into this market in earnest with our own proposed exchanges, we need to guard against whether the ESG criteria are overly flexible, and, in particular, when the ultimate rating ends up privileging the “social” or “governance” aspects (the “S” and “G,” respectively) rather than the environmental (the “E”). This has resulted in dubious players issuing bonds under the rubric of sustainability, including a number of clean coal projects in China that were sold by Spanish oil company Repsol. The result is a loss of credibility and efficacy that could undermine the entire purpose of the exercise.
The point of these examples, which are just four of many, is not so much to point to the possibility that green projects, operated in conjunction with the private sector, may turn out to be a marketing tool, without delivering on the intended environmental objectives. After all, corporations are primarily in the business of making profit, and market their goods and services in a way that enhances said profit as much as possible.
But just as government plays a role in regulating false claims of efficacy in pharmaceutical products or imposes conditions to ensure product safety in food and children’s toys, it should also play a role in ensuring that claims on green practices are broadly justifiable, rather than claiming caveat emptor, and placing the entire burden of verification on the shoulders of the busy and often underinformed consumer. Alternatively, government can operate in closer collaboration with nonprofit efforts—such as the Green Label scheme under the National Environmental Council—to ensure that such labels do not become an unwitting tool of unscrupulous greenwashing attempts.
Regulation over misleading environmental claims is currently practiced in the Australia, Canada, the European Union, Norway, and United States, to varying degrees. It is worth exploring if such regulatory moves may be warranted here. To this end, I wonder if the Minister will be willing to elaborate on regulation specifically targeted at greenwashing, and whether there are such existing collaborative efforts with NGOs to account for greenwashing risks in environmental labeling.
Simultaneously, we could promote and develop a private sector that undertakes environmental audits, perhaps by requiring that listed firms, or firms that are among the major emitters (regardless of size), routinely report such audits, much like how we require routine financial statement reporting (albeit with lower frequency). This would have the added benefit of creating green jobs for our next-generation economy.
Having said my piece, I support the motion.