As the global focus on sustainability intensifies, the financial sector is pivotal in steering capital towards sustainable and responsible investments. Sustainable finance serves as a potent instrument for expediting the shift towards a low-carbon economy, mitigating climate risks, and nurturing sustainable development.

A comprehensive understanding of the core principles and best practices is vital for sustainable and responsible investments to achieve their maximum potential. Across Southeast Asia, leaders in the financial sector unequivocally agree that sustainable finance education is essential to mobilise finance for critical environmental and social developments.

According to Kattiya Indaravijaya, CEO of Thai banking group Kasikorn Bank, the most significant challenge in addressing the gap in sustainable and responsible investments is the limited knowledge both borrowers and investors possess regarding environmental, social and governance (ESG) standards and the impacts and opportunities of climate change. Indaravijaya was speaking at the Singapore FinTech Festival, where expert speakers highlighted the urgent need for sustainable finance education.

At the same event, prominent speakers discussed the numerous challenges arising from the lack of sustainable finance education. They also explored key topics to be addressed, that often stem from a limited understanding of sustainability within a business context and its importance in ensuring effective operations. These speakers, whose reflections are summarised below, include Eric Lim, Chief Sustainability Officer at regional banking firm UOB Group, Mark FitzPatrick, Special Advisor at insurance company Prudential plc, and Helge Muenkel, Chief Sustainability Officer at the Singapore-headquartered DBS Bank.

Complex Trade-offs

Achieving sustainability requires a delicate balance, necessitating trade-offs between short-term costs and long-term benefits. The economic development and sustainability goals often conflict, particularly in developing economies, further complicating the decision-making process. Both goals significantly impact people's well-being, making it crucial to navigate these trade-offs carefully.

For example, developing countries are still largely reliant on fossil fuels, not just for energy but also for jobs, fiscal revenue and exports. Transitioning these economies towards clean energy will require significant investments to overhaul existing energy infrastructure, retrain staff and ensure energy security and affordability are balanced against decarbonisation.

However, most businesses are already seeing the need to account for climate and sustainability risks in their day-to-day operations, and decarbonisation is widely accepted as a key policy priority. As such, businesses and policymakers can consider the ways in which climate solutions can bring about economic development. Most nature-based solutions do not operate within a vacuum and can potentially benefit local communities in addition to meeting carbon sequestration or ecosystem goals. For example, apart from generating carbon credits, the Katingan Mentaya peatland conservation project in Indonesia, has also helped conserve the local biodiversity and the livelihoods of villagers.

Misalignment of Incentives

Often, businesses and individuals might prioritise short-term incentives that conflict with the long-term sustainability objectives. For example, companies responsible for maximising shareholder value may not allocate adequate resources for investing in green opportunities or adopting sustainable practices. Likewise, consumers might continue to prioritise convenience and cost over pricier sustainable options when making purchasing decisions.

One way to align financial and sustainability incentives within corporations is by tying executive compensation to ESG metrics. This will require compensation committees to consider what key performance indicators (KPIs) they can use to align the interests of management with long-term sustainable development or ESG goals.

Investors will also need to adjust their investing strategies to align with national and global sustainability targets. This could involve setting sector-specific policies that incorporate emissions reduction targets, or incorporating taxonomies and screening methodologies to evaluate potential investees. For instance, BNP Paribas uses the Paris Agreement Capital Transition Assessment methodology, which relies on an assessment of physical assets linked to financial instruments and the alignment of such assets with climate scenarios.

Greenwashing

Among the most insidious challenges in the transition to net-zero is greenwashing. Companies are increasingly aiming to improve their brand image by engaging with the growing consumer awareness of responsible business practices. However, this can often result in exaggerated or misleading claims about the environmental benefits of their products or operations. Furthermore, the absence of clear and enforceable standards for determining sustainable practices or products can make it challenging for consumers to differentiate between genuinely sustainable products and those merely marketed as such.

On the other hand, some companies fearing the backlash of greenwashing have chosen instead to remain silent about their climate strategies, a trend that has been criticised by experts as "green hushing". This makes it difficult for investors and consumers to scrutinise how companies are implementing sustainability-related initiatives, especially if they have set net-zero targets.

Another cause for concern that has recently sprung up is “transition-washing”, which is when carbon-intensive companies do not use green finance to pivot away from fossil fuels or only transition to cleaner practices in limited jurisdictions. To address this, companies require a clearer definition of what constitutes a “credible transition”, as Singapore’s second minister for finance Indranee Rajah put it. Sustainable finance guidelines and taxonomies, the latter of which is currently being developed at ASEAN and national levels, will be able to better define the boundaries of transition activities.

In April 2023, non-profit organisation ClientEarth produced guidelines to help Asia’s financiers identify and avoid greenwashing. Although specific to the finance industry, the guidelines recommend steps to avoid greenwashing that could be useful across sectors. These include recommendations that companies scrutinise the credibility of any green statements, be transparent about how green objectives are integrated into their products and ensure that internal operations are consistent with the company’s image.

Collective Action Needed

In conclusion, enhancing knowledge in sustainable and responsible investment is a collective responsibility that requires individuals, industries, financial institutions, regulators, and policymakers to work together in addressing the sustainability crisis. By cultivating a robust understanding of key sustainable finance principles, challenges and solutions in sustainable and responsible investment, promoting transparency and standardisation, and encouraging collaboration, we can unleash the full potential of the financial sector in driving a sustainable future.

Collaborations between top financial and learning institutions so far have helped to enhance awareness and understanding of the knowledge gaps in sustainable finance. For example, the Sustainable Finance Knowledge Certificate was developed as a result of collaboration between the Monetary Authority of Singapore’s fintech platform Elevandi and Singapore Management University’s SMU Academy. Launched at the Singapore FinTech Festival in November 2022, the programme to provide participants with valuable insights shared by industry experts, regulators and policymakers.

In Malaysia, free e-learning programmes on sustainability can help provide a baseline for sustainable and responsible investing education. For example, Bursa Malaysia has launched an e-learning programme in sustainability to help practitioners of all levels to understand the impact of sustainability on businesses and how reporting can help businesses manage ESG risks. Training and development organisation HRD Corp also offers an e-learning programme focused on corporate sustainability fundamentals. Individuals who are keen on more specialised knowledge on sustainable financing and investment can explore advanced courses with the United Nations Development Programme’s Sustainable Finance Hub, the Asian Banking School’s certified expert in sustainable finance programme and Monash University’s sustainable finance course, to name a few.

The time for urgent action is now; our planet and future generations depend on it. By fostering a culture of sustainability education and collaboration, we can catalyse the necessary changes within the financial sector and beyond. As more stakeholders embrace sustainable finance principles, we can collectively build a resilient, prosperous, and sustainable future for all.

Yong Liang is Education Programme Manager at Elevandi, where he oversees learning and mentoring initiatives across its platforms, including the Singapore FinTech Festival. In his previous role in Enterprise Singapore, he championed the growth and expansion of Singapore's EdTech ecosystem.