Episode Transcript
[00:00:04] Speaker A: Today on the ESG podcast for John Lothian News, we're talking with Harry Cho, managing director, head of sustainability and sustainable finance for the SGX Group. Welcome, Harry.
[00:00:20] Speaker B: I am so glad to be here, Sally.
[00:00:22] Speaker A: Singapore Exchange SGX Group recognizes more than 100 green social and sustainable bonds. What is the difference between these bonds and sustainability linked bonds or slbs?
[00:00:38] Speaker B: Let me just back up a little bit and talk about why continuously looking at instruments that channel financing to mobilize financing where it needs to go, whether it's sustainability, social or climate, why this is important because ultimately the role of financial institutions and also then platforms and services and infrastructure around that, such as SGX, the key role is financing that transition to come. And of course, any risk management instruments which we can talk about a bit later. Green social sustainable bonds have been well established. It's been sort of the starchild of the sustainable product suite on a global basis for about eight, nine years by now. So the use of proceeds instruments have a good track record.
There is less evolution at this point on the right frameworks or principles or standards to be using for those. Let me just reiterate though, that all of green social sustainability, sustainability linked and transition bonds is a bit of a mouthful. So let's call that GSS bonds, just in general.
Yes, GSS that meet our bond listing requirements can be listed on SGX. So just because a bond is not part of our sustainable fixed income initiative, it does not mean they can't list here. Issuers of green social sustainable bonds can apply, as you rightfully said, for recognition under the SFI Sustainable Fixed Income initiative. And there are certain criteria that needs to be met there, which is pretty standard for good standard bonds out there by now, which is alignment with recognized standards such as ICMA or CBS. The climate bond standards to have a reputable external reviewer to confirm alignment with these principles or standards at issuance, for these to have an ongoing post issuance report for disclosure, et cetera. You also mentioned that slbs are kept under review. One of the reasons is because it is a fast evolving space as an instrument, but they have significant potential to continuously channel capital towards climate and sustainability. Ambitions of the issuer the thing that's important for slbs is that it is inherently a forward looking instrument. What does that mean? It means that slbs set targets, that's forward looking. SLBs overall are important, but they have based certain integrity and credibility criticisms due to a number of factors around the structuring of these instruments that might be the type of KPIs, the KPIs not being material enough the ambition level set, some of the call date features.
Some may consider the coupon step up rate to not be material enough from sort of overall basis points, perspective, et cetera. So there is ongoing efforts to increase the robustness of the slbs. So inclusion of this in SFI is fairly straightforward. But at this point we opted to not do so, so that it has chance to evolve.
And very importantly, we want the SFI and its evolution to address some of the SLB considerations and address some of these concerns around it by ongoing review and conversations with our ecosystem.
[00:04:20] Speaker A: The SLBs are very important in the transition, is that correct?
[00:04:26] Speaker B: Absolutely agreed.
[00:04:27] Speaker A: So that means that they are different and they're different because they are useful to the transition. Can you talk about that a little bit?
[00:04:36] Speaker B: Sure. So at the heart of slbs is what's called the spTs, right? So those are the targets themselves, that sustainability performance targets that get set as a key part of the instrument. Whilst it doesn't make sense for exchanges to mandate specific thresholds and sustainability on the sustainability performance target, we do provide guidance to the market example by partnering with the likes of ICMA or CBI in training and capacity development. The component that makes the svts the sustainability performance targets credible is that it has to be relevant to the company, it has to be material, I. E. Material to the issuer's business and ideally follows the science based benchmarks and has certain third party accreditation, for example, for the climate bond standards that's imperative.
[00:05:36] Speaker A: So can you give me an example of an SLB just generically? You don't have to mention anything specific.
[00:05:45] Speaker B: Sure. So what's important is that the sustainability performance targets are measurable. So what naturally ended up in the evolution is that many of the spts ended up being around emissions ambitions and then often those are pegged towards the science based targets, which many companies have already set and have been tracking the decarbonization or decreased performance over time. So then how the SLB would look like is depending on the tenor of the bond, let's say it's five years, then it would say on a yearly basis, if your emission today as a company is just for the sake of argument, let's say 1 million tons of co2 equivalent, then there would be an expectation that it follows a science based target, let's say 5% per year or 4.5% per year. And every year if you meet that, there could be an incentive. But many instruments also say if you don't meet the incentive, then there is an additional payout on the coupon rate. So that's how it works and that's how the slbs are devised.
[00:07:03] Speaker A: Can we talk about the accountability levers that SGX would like to see on slbs versus what they have right now?
[00:07:11] Speaker B: Sure, absolutely.
I think like any instrument, but in particular for sustainability related instruments, all of GSS bonds, including slbs, should focus on the disclosures and data. So it's fundamentally essential to promote transparency, which then adds to accountability. Right, measurable accountability.
So we always encourage the issuers to demonstrate their commitment by adhering to transparency. And then the second key component would be having credible spts or the sustainability performance targets, as I had just mentioned. And of course, depending on your financing rates. And how do you make that delta in, let's say, the coupon rate if you don't meet certain of the spts as meaningful as possible? For example, many instruments have had that coupons step up if the spts are not met, let's say, at 25 basis points. However, of course, depending on the cost of your borrowing rate, 25 basis points might be quite significant, or it might be on a proportionate basis, very little. So how do you make this step up meaningful in the sense of, in comparison to your borrowing rate?
[00:08:40] Speaker A: Do you see anything else happening in the area of GSS or slbs?
[00:08:46] Speaker B: Yes, broadly speaking, a lot of the efforts are currently going into ensuring the credibility, in particular around the definition of transition that supports instruments, slbs as well as transition bonds. And so I've mentioned it before, but market engagement and capacity development are super important levers that we're also very much so focusing on.
[00:09:13] Speaker A: Moving on to your work with Blackrock, what exactly is going on there? It's another initiative that sounds pretty complex.
[00:09:24] Speaker B: So let me unpack this a little bit and sort of go back in time as to how this arose in the first place. Now, we're moving instruments from bonds because we're a multi asset exchange, right? So we're, of course a well known bond listing platform and therefore we have leading market share around that. But the other aspect, of course, securities and structured products such as ETF, and we also actually have our own index offerings as well.
But for this particular instrument, there are certain broader parameters that's good to take into context. First of all, there has been a general trend in rising popularity of index investing or passive investing. So index based products and solutions have been gaining sort of the AUM following on a global basis, albeit faster in certain regions than others. And we believe because of this increasing market share of capital flow, there is an asset allocation. Essentially there is huge potential. And portfolio allocation too. There's a huge potential for this to be a transition financing tool to help mobilize capital at scale towards the real economy. Okay, so let me just second component to touch upon that. There is an ongoing discussion and trend for financial institutions to say it is not enough for my portfolio to be artificially going down in emissions. It is important that the decrease in my portfolio emissions is a reflection in the real world of the constituents within my portfolio. Okay, so I will further unpack this a little bit as to how this instrument addresses that. So then, SGX is a global capital and derivatives marketplace with a strong APAC and Asia Pacific nexus.
We have put a priority to facilitate capital and investment flows towards APAC, as well as creating hedging tools on a global basis, because derivatives is also a global suite of tools. Now, talking about the MSCI Climate Action index. So I'm going to shorten that to MCA, since we have so many long names and acronyms. But MCA, this originally started as a partnership with MSCI. So the index comes before the flow and productization, and the index serves both the ETF and derivatives world.
Now, I mentioned already that asset owners, the likes of pension funds, sovereign wealth funds, the deployment of capital of the insurance premiums, these are what's called aos or asset owners.
A common feedback. And these guys are important, by the way, just to reiterate, because they are at the apex of the financial boot chain, if you'd like, they are the ones who allocate aum to all the different asset managers. And eventually it blows down the banks and others as well. Right? So a common feedback and an ask from asset owners for some time has been indeed what I mentioned, linking the investments to real economy decarbonization. So that was at the heart of the problem statement that we wanted to resolve. And another aspect was that traditional climate solutions, and I talk about climate solutions, not ESG solutions, the traditional climate solutions have focused more on just low carbon allocation, or exclusion of high emission sectors, or alignment to Paris agreement. So pabs and climate transition benchmarks like ctbs, which are by nature a little bit more exclusionary, it excludes certain sectors, excludes certain regions, right? So there was also feedback that it would be important if we were to look at real economy decarbonization to ensure that we don't mechanically exclude sectors and we don't mechanically exclude regions.
And this index methodology was conceived with feedback from approximately 30 asset owners that we worked together with MSCI on. So some of the unique characteristics of MCA is that it is actually very simple. So I would like to argue that this is a simple instrument rather than a complex instrument. It's very transparent and as I just mentioned, inclusive of sectors and countries. It is bottom up because it looks at constituent company by company to assess them on their climate action taken and it also facilitates engagement with these companies and so on. Based upon this assessment as a bottom up approach, assessment of the constituent companies of the parent index, let's say MSCI World, there is a selection made of companies in the top half of every sector that are effectively tackling their emissions and have forward looking ambitions or utilizing certain climate indicators. Forward looking indicators. And these include, for example, science based targets that companies have set and whether the management have a good risk management in place to assess climate change and its impact on the company. And some of the baseline filters do remove certain controversial companies, which is quite a common practice and for the highest emitting companies. So let's say you have a whole MSCI world, the top five highest emitting companies. It's not an automatic exclusion of those companies. They are however excluded if they do not have an approved science based target in place. But broadly speaking, the rest of the 95% are sector inclusive and geography inclusive. MCA is a global ecosystem focusing on transition. So there really has not been many instruments out there at all in the index world that focuses on transition, including in the emerging markets, which is really where the change needs to be. So whilst the methodology is applicable on a global basis, it can apply to MSCI World or MSCI Europe, but also MSCI Japan and Asiax Japan, as well as then the whole suite of derivatives products, the one that's listed on SGX as an ETF. Within these, as a partnership with ishares of Blackrock, is the MCA Asia X Japan ETF. Now we all know Asia is going to be the most important battleground for real world decarbonization. The world will win or lose. The world will be livable or not livable based upon success in Asia X Japan. So with 85% of the fossil fuels powering the region's energy in Asia. So we thought it's important, given this dearth of Asia X Japan based climate financial solutions and instruments, that this can really help push and help investors support companies who are forward looking, who are making that change, even if they may be in a high emission sector today.
[00:17:26] Speaker A: Sounds like a wonderful product.
[00:17:28] Speaker B: We really wanted to focus on the materiality of the impact that we can have.
[00:17:33] Speaker A: I hear that in everything that you're saying, the changes that are reflected in your products are real changes that are happening in the world.
[00:17:43] Speaker B: Yes, and I think that is a critical role that SGX group can play as that connectivity between local, regional and global investors to what needs to be financed locally, regionally and beyond. And along the way, of course, these investors will require tools and so that would include such as MCA derivatives, but also other derivatives products.
For example, we do have a big commodities futures franchise. We've been making efforts in order to support decarbonization through the commodities world. Whilst we are cash settled derivative house, we have been launching electric vehicle supporting minerals and metals such as cobalt and lithium contracts to support the EV manufacturers. For example, in the pricing of these metals, which can be volatile.
[00:18:52] Speaker A: And I'm sure the world is looking for that.
[00:18:54] Speaker B: Yeah, because for example, price of lithium has been notoriously volatile, jumping three times the price within a period of a year. So imagine you're an automotive maker who needs to be sourcing these metals, or battery maker.
How are you going to ensure ongoing sustainability of your production base if you don't hedge for the price of these critical metals?
[00:19:22] Speaker A: I know it's an astonishingly complex thing happening here, but it's really interesting to hear you talk about SGX and how you are taking such an active role in all of these aspects of the markets. Has there been a lot of discussion at SGX about your role in the markets? Is this something that is a point of conversation frequently? Like how far do we go?
[00:19:54] Speaker B: Yeah, absolutely. Everything that we do, we categorize them into why we do it. And it broadly falls into four buckets, number one. I mean, we are a listed company as well. So there are certain things we do, but it's important. What we do is important because it is a demonstrative leadership to not only other exchanges, but also to other listed companies on SGX. And everything we do goes into SGX as a business. Right? So these platforms, different multi assets, whether it's securities or derivatives or bonds or even carbon markets that we have as a jv, we try to embed sustainability and climate considerations into every single asset class that we run. And then thirdly, we are a frontline regulator with a strict chinese wall between the business side and of course the SGX recordco, which is an independent SPV, but still part of SGX Group. And so there are certain levers that we push, especially around disclosure as a regulator. And then broadly speaking, all of what I described, the North Star is the ecosystem. So aspects like capacity development, collaboration, partnership, that falls into that North Star, which is the creation of that broader ecosystem.
[00:21:24] Speaker A: I understand that you've taken a position on ISSB aligned climate related disclosures. Is this going to advance? I mean, I think the last release I saw on it was a while back.
[00:21:37] Speaker B: It's good to note that our market has been a mandatory sustainability reporting regime since 2016, and there are certain components to it which is on a comply or explained basis. But pretty much 99% of our market follows mandatory sustainability reporting.
Since last year, we have actually made climate related disclosure mandatory, and that was based on TCFD. Of course, TCFD has now been sort of subsumed by ISSB. So already many of our listed companies are well on their way on executing TCFD in their disclosure overall. So if you put it that way, actually, a lot of our companies are very well positioned to undertake ISSB and for Singapore to be one of the markets that have good adoption of ISSB standards. Now, why did we think that ISSB is important? First of all, it's important to note that ISSB has been endorsed by IOsco, including by MAS Monetary Authority of Singapore, and because it is then really a standard that is a global baseline that is backed by regulators, that is a very important component, and a new development on a global basis in the sustainability reporting standards, because most of it has been voluntary so far. So, like we have done for onset of the sustainability reporting back in 2016, as well as for climate related disclosure that started last year, we have done a public consultation, or rather, I should say, okay, let me just rephrase that part. So, like, there has been public consultation in the past for the sustainability reporting as well as climate related disclosure. This time, when we view the ISSP, the accounting and Corporate Regulatory Authority, or Accra, and then SGX Reco, have essentially set up what's called a sustainability reporting advisory committee. Srec, which has looked at the ways to undertake this rollout.
There has been a public consultation for which the deadline was 30 September. SJX Reco and the SRAC, the committee itself, are busy considering all of the feedback that's been received from the public consult before the final recommendations will be out by 2024. This is not just listed companies. There are certain thresholds for private companies of certain size who are also captured in the scope of SREC.
[00:24:40] Speaker A: I know I've talked to some people who, I think primarily here in the United States, there's pushback against the ISSB disclosures. They feel that it's just too hard to compare, and that align everybody with one set of values was not going to work.
[00:25:06] Speaker B: That's why it's important for every jurisdiction to consider what is the best way to incorporate some of these international global baselines. And so our market also will take into due consideration, as well as open consultations and public consultations to really understand what's the best way to roll this out in our markets.
[00:25:33] Speaker A: Okay, yeah, that's fair. That sounds fair. I understand that. So let's talk about what you're doing with the UN, CDSC and the Monetary Authority of Singapore.
[00:25:43] Speaker B: CDSC. I'm sure everyone knows what UN is. United Nations CDSC stands for Climate Data Steering committee and NZ DPU FYI stands for net zero data public utility. Now, the initiative under which the MoU was signed was indeed between CDSC, MAS and SGX to collaborate on strengthening key climate transition related data.
And it aims to synergize already ongoing work under MAS, Project Greenprint and Esgeno, which is a development, a data disclosure platform that SGX has been working together with MAS as part of Project Greenprint. This disclosure portal will collaborate and look at synergistic points with CDSC's net zero data public utility, or NZDPU, as a starting point, it will allow companies that report into ESG no with their consent for data on scope one, two and three ghg emissions to be transmitted seamlessly to the NZDPU. So this will help enhance the tracking of these companies'climate commitments, and the companies will in turn benefit from having access to this global database to inform their own decarbonization efforts, among other.
[00:27:12] Speaker A: That's the point. I mean, I read through the press release and there are a lot of partners in this, and it sounds complex, but in the end, what it's trying to do is something that is very much needed.
[00:27:26] Speaker B: Yeah, absolutely. So that's why we commend the work of NZDPU and CDSC. And I'm sure there will be great work to come in the upcoming COP 28 around the data work that's been being done by these entities as well. But what's really important, first and foremost, is just to create again that level playing field where Apple to apple comparison can be made and material data. I keep on going back to materiality because it's such an important concept in sustainability and climate that the material information is available, ideally free of charge. Right, so that everyone can utilize this data, this very, very important, fundamental data.
[00:28:15] Speaker A: You mentioned COpE 28. Will you be going?
[00:28:17] Speaker B: I will be going, indeed. And we've been going for COP 26 in Glasgow, COP 27 in Egypt, and COP 28 in UAE this year as well.
[00:28:29] Speaker A: So what do you think will be the big conversation for the financial world. At COP 28, do you have any sense of what people are going to be talking about there?
[00:28:39] Speaker B: Yes. So just keeping in mind that what goes on in the negotiation rooms is separate from indeed the private sector actors who would be turning up, such as ourselves. From the negotiation perspective, this is a big cop because there is the first ever global stocktake of ambitions and performance.
How much that will immediately seep through to the discussions outside the negotiation room is to be seen because these discussions are going to be ongoing for two plus weeks during COP. The financial sector, we believe would be focusing on a number of components. Number one, there is, surprise, surprise, focus on transition. There is also focus on transition inclusive of emerging markets, hard to abate sectors, and how that links back to the real economy, decarbonization. So you see how there is rhyming on what we're doing with the focus on a global basis. That's why the mobilization products that we mentioned are important.
So there will be quite a bit of discussion around that. And not only just climate change mitigation, but already from last year, there's been significant discussions on climate change adaptation and how to help support the financing of that. Blended finance solutions would likely be part of this for both, of course, climate change mitigation, but also adaptation basis.
And also how does nature link into this? This topic started to come up quite prominently already from COP 26 and even louder in COP 27, and likely will be a key feature in COP 28 as well.
[00:30:24] Speaker A: What do you mean when you say adaptation?
[00:30:27] Speaker B: Sure. So adaptation is what can you do as a good measure to prevent changes. So if you know that the prediction, we know that Singapore is a vulnerable island state, and if the sea level rises by a meter or 2 meters, significant part of Singapore might go underwater. So then what is an adaptation measure? So there'll be raising of the ground to ensure that this can withstand one or two meter sea rise level. And this is essentially what's being done around the world to prevent larger catastrophes by adapting in advance.
[00:31:11] Speaker A: You had a large event in early November. What was that about? And did anything occur that our listeners should know about?
[00:31:20] Speaker B: Yeah, so we indeed held inaugural global transition finance summit in partnership with a number of partners. It was a gathering of about 300 plus community, not only local, but regional and global basis.
And really the core of the discussion was how do we finance that transition?
So there's global institutions looking at transition, and there's global institutions who are interested in Asia. So that was sort of the key topic. How do you actually mobilize that capital. How do you actually measure transition in Asia in a credible way when there's so many more factors at hand, such as ensuring that you balance on the socioeconomic factors as well? That it is also true. And the recent geopolitical events have also shown that climate change is not the only priority out there. So it was a sobering point with global asset owners in the room and of course, the rest of the financial community and a number of real estate, sorry, real economy actors, where we discussed, what are some of these balancing points that we have to take into perspective priorities as an organization.
But how do we really practically channel some of this financing towards where it's most needed? So these were some of the practical sharings that happened as to what institutions are doing and what can be done.
[00:33:00] Speaker A: More fascinating. So you learned a lot.
[00:33:04] Speaker B: We've had some great insights being shared by our speakers, and I think it's fair to say that the delegates really appreciated the learning that they've had from the discussion and the full day.
[00:33:18] Speaker A: You're doing important work.
[00:33:20] Speaker B: Thank you, Sally. And I can only say that we're not the only ones. Of course, there's a whole ecosystem that needs to work together and do this, and so we will continue to do everything we can to support that ecosystem.
