In the drive to build a sustainable city-state, we have to ensure the voices of small and medium-sized enterprises (SMEs) are heard. The reason why SMEs have to be part of the conversation about sustainability? In 2019, there were approximately 273,000 of them doing business in Singapore, comprising 99% of all enterprises in the city.[1]

Because their contribution to the local economy is so huge, SMEs’ commitment to sustainable practices will make a difference. From their policies on emissions and water efficiency, to ethical supply chains and environmentally friendly manufacturing, it’s vital that they get support to go green across their operations.

It’s not just in Singapore where this is such a big issue. For all practical purposes, SMEs are the main drivers of local economies region-wide. They make up more than 96% of all Asian businesses, providing two out of three private-sector jobs on the continent. If they were to operate more sustainably it would make a massive contribution to meeting the UN’s Sustainable Development Goals (SDGs) on schedule by 2030.[2]

A deeper shade of green

How can sustainability be embedded into SMEs’ operations? One of the keys is to reduce the cost of capital for businesses that have qualifying environmental, social and governance (ESG) scores. In Asia, to date, China has led the way in green lending, with the People's Bank of China (PBOC) making effective use of artificial intelligence, cloud and big data technologies to collect statistics and regulate transactions in this space.

Singapore has made great strides too. There’s been a strong mandate from the Monetary Authority of Singapore (MAS), and green finance is very much on the agenda here, in much the same way as wealth management was a priority in the early 2000s.

We’ve also seen financial institutions, like OCBC, introduce innovative sustainable financing frameworks to help Singapore’s SMEs go green. But there’s an outstanding opportunity to go much further and, in doing so, provide a lead for other ASEAN countries to follow.

Identifying the challenges

For the moment, access to green finance is limited primarily to Singapore’s biggest companies. They’re the ones with ready access to consultants and ESG data, and with sufficient resources to track and measure their activity – all of which are used to produce impressive reports.

This begs a fundamental question: how can we level the field and make it easier for SMEs – Singapore’s biggest engine of economic activity – to access and take advantage of this essential new source of capital?

For this to happen, a number of challenges are going to have to be overcome. First, we know many SMEs lack the resources to gather the ESG data that’s needed to acquire green certification status. It’s complex, costly and time-consuming for them to do so.

As things stand, they’d need to hire a specialist to help them gather data on their operations and understand where improvements need to be made. Today, the information and infrastructure they need to understand their ESG footprint just isn’t there.

There’s also a deeper issue. Many SMEs still view sustainability and profitability as conflicting goals. There are definitely some great initiatives underway to shift this mindset; Enterprise Singapore’s Green Innovation Challenge is a case in point. But it’s an ingrained perception that’ll take time to change.

Even if SMEs do manage to assemble all the data they need to access green finance, challenges remain. For financial markets, making these relatively small loans one by one, here and there, is extremely resource-intensive. For banks, it’s a high-cost, low-return activity, the economics of which are hard to justify.

Mapping a way forward… levelling the field

What can banks and regulators do to overcome these challenges and open up a pathway to green financing for SMEs? First, the financial infrastructure needs to be enhanced.

There’s an analogy here. In many countries, until relatively recently, it was hard if not impossible for people to access unsecured loans. Then, in the 1980s/1990s, credit scoring and credit bureaus were introduced, and this changed the game.

We need the same kind of evolution for ESG and green loans. How do you create the equivalent – a green bureau, if you like – that can rate SMEs, of whatever size, applying a consistent logic so that scores can be used by banks for underwriting green loans?

The second thing that’s needed: strong incentives for banks to make these loans – and for SMEs to make use of them. The simplest kind of incentive is more attractive loan pricing for SMEs with the best green profiles – the ones that generate less carbon, use less water, take advantage of more renewable energy, and so on.

Those kinds of businesses would get access to cheaper capital than their more polluting peers. And that would apply even where they’re making similar amounts of profit, with similar margins. The message this sends out? Companies that make the effort to go green get rewarded with cheaper capital. This will provide a powerful incentive to change behaviours.

To drive momentum, the regulator needs to be very proactive in pushing this agenda into the banks. Currently, it’s not that straightforward for banks to embark on this journey. As I said, there are exceptions in Singapore. But initiatives like OCBC’s can and should be more pervasive.

Another priority: raising awareness. The goal? SMEs and the broader population have to become more aware of the importance of sustainability as part of the SME business model. This can be achieved by making it easier for consumers to identify and buy sustainably-manufactured products, potentially paying a price premium for them (just as they already do for recycled shopping bags, organic fruit and vegetables, and so on).

For that dynamic to happen, two things must be in place. Consumers have to be aware. And they have to be willing to pay the extra cost. ‘Sustainability in Singapore’, a consumer and business research project we worked on with the WWF, clearly shows that if consumers know how to shop sustainably, they will. And most of them are happy to pay a premium.

We found a clear unmet consumer demand for more sustainable products that are widely available across physical and online channels. Key to taking this further? Introducing a consistent rating-agency-type approach, like the eco-labelling/scoring that happens in Europe, for example.

If that approach were to be consistently deployed, it would provide an incentive for SMEs to become greener – they would see the bottom-line business benefits of offering more sustainable products. Meanwhile, consumer demand keeps on growing. That’s the kind of virtuous cycle we need to aim for.

Near-term goals

Progress to date in Singapore has been driven by the national agenda, with the MAS playing a major part in encouraging banks, as well as SMEs, to change how they behave. We’ve also seen growing pressure from consumers, who are steadily becoming much more aware of the importance of sustainability. This helps to influence the whole system to follow through.

So what are the immediate priorities? It’s abundantly clear that an accelerated shift is needed. And that without a fundamental change in banks, and in the way the banking system works, such a shift won’t happen.

This has to be the direction of travel. Banks are already required to demonstrate to regulators how green their own businesses are. That dialogue needs to be extended. They’ll also have to be ready to share the ESG profile of each of their corporate customers. And having done so, they will need to show that their greenest customers are getting better access to capital than the others.

Once that dynamic comes into play, it will have a multiplier effect on the whole economy by changing how capital flows within it and how businesses make decisions.

No longer a “nice to have”

Like I said at the start, there’s still some way to go. But awareness is rising rapidly and the mood has changed dramatically in the past 12 - 24 months. Now we’re at the point where sustainability is no longer considered a “nice to have”. It’s recognised as core to how companies should operate and behave. Just like 15 years ago, when companies had to start thinking about what it meant to become more digital, today they’re going through a similar process with sustainability.

The difference? This shift will be much more fundamental. Sustainability is much more than a set of tools and technologies. Yes, digital and data provide some of the most vital accelerators for making sustainability integral to business. But it’s an entirely new logic, a new outcome, almost a new theory of economics – one whose time has come.

I’d love to hear your views on green finance, and how we can make sure it reaches more and more of Singapore’s SMEs, so please get in touch.


Disclaimer: This document refers to marks owned by third parties.  All such third-party marks are the property of their respective owners.  No sponsorship, endorsement or approval of this content by the owners of such marks is intended, expressed or implied.



PC Chakravarti

Managing Director – Strategy, Banking Sustainability Lead, Growth Markets

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