Can you put a value to the current and future impact of sustainable activities? Associate Professor Zhang Weina argues that businesses need more people trained in green finance to provide the answers.
Companies face a host of dilemmas when it comes to implementing sustainability. Should they invest in new technologies that can help them to reduce greenhouse gas emissions today, or wait until the authorities impose carbon taxes? This involves a trade-off between current and future profits, a question that cannot be properly answered without the help of trained professionals with the financial know-how to compare the different alternatives.
From researching credit ratings to environmental, social and governance (ESG) ratings, NUS Business School’s Associate Professor Zhang Weina has been studying companies’ behaviour and impact evaluation. She is the Academic Director for the Master of Science in Sustainable and Green Finance programme and Deputy Director at NUS Sustainable and Green Finance Institute (SGFIN). In a hybrid event organised by HeadHunt in collaboration with the Lifelong Learning Institute, Assoc Prof Zhang discussed filling the gap for green finance talents.
On green finance
In her introduction, Assoc Prof Zhang explained that finance is about estimating the value of an activity or project, which can then help us determine whether it is worth pursuing. A holistic approach to value goes beyond market price or profitability to weigh both the current and future profits for stakeholders. Such valuation helps in the efficient allocation of available resources in the economy, by considering both current and possible future changes.
Green finance is not a separate field from traditional finance. It spans all parts of the finance field, including public finance, corporate finance, personal finance, international finance, and more. While we often think of sustainability as protecting the environment, it also encompasses the social and economic outcomes both now and in the future.
Take, for example, companies that set up childcare centres in the workplace to give peace of mind to working mothers. Taken at face value, childcare is a cost centre that does not seem to help with profitability. But empirical evidence has shown that these socially responsible companies receive payback during tough times. Employees that feel a sense of gratitude or loyalty work much harder for the company during a crisis.
The current global green finance landscape
Looking at the global landscape, the 26th United Nations Climate Change Conference (COP26) in 2021 has seen countries pledging to reduce carbon emissions from 52.4 to 41.9 gigatons by 2030. But this is still a long way from cutting emissions to 26.6 gigatons required to keep global warming to 1.5 degrees Celsius by 2030.
Assoc Prof Zhang explained why countries find it hard to commit to environmental goals, “Developing countries need to balance sustainability with economic development. If the penalties for pollution are too heavy, companies may run into financial difficulties and be forced to shut down. Developing countries also baulk at the heavy requirements that are being imposed on them by developed nations.”
For developing countries to see the economic benefits of sustainability, more evidence-based research and technological innovation need to be done. Sometimes the solution does not benefit everyone, and there is a trade-off. Rigorous training in gathering the right data, computation, valuations and simulations is needed to make informed trade-off decisions.
We need big players to move
Looking at the big picture, global institutional investors have US$103 trillion in assets under management by 2020, but only US$10 trillion was pledged in the Net-zero Asset Owner Alliance in 2021. People are committing, but there is room for more action.
Governments are at the core of this global movement. They need to implement regulations and provide grants and subsidies to nudge companies to go green. In turn, firms need to consider the kind of technology to adopt for better human well-being. There are also non-governmental organisations, especially in Asia, where the impact investing space is developing, willing to provide funding to test ideas for sustainable development.
Investors reward cleaner companies
Investors increasingly prefer greener companies. In a study of 23 countries, researchers showed that financial institutions’ exposure to stocks in high-emission industries has reduced after 2015. Such reduction is more significant for countries with high climate awareness.
In another study across 27 countries from 2007 to 2020, we see a widening gap in the valuation between high-emission companies and low-emission companies over the years. This is after controlling for differences in the firm and country characteristics.
“The results reveal the changing investors’ preferences and behaviour through financial market signals,” said Assoc Prof Zhang.
The Singapore case
Zooming back to Singapore, the Singapore Exchange (SGX) has seen an increasing number of green, social and sustainability-related bonds listed in the past few years. Many of these bonds are from overseas issuers in India, South Korea, China, Indonesia and more, showing Singapore’s appeal as a green finance hub in Asia.
The country is also home to Climate Impact X (CIX), a carbon trading hub launched by SGX, DBS, Standard Chartered and Temasek. Different from the mandatory Emissions Trading System in the European Union, CIX is a voluntary market. Time will tell the market’s response to CIX and its impact.
Since 2019, the carbon tax has been imposed on big emitters in Singapore at S$5 per tonne. This covers about 90 per cent of Singapore’s total greenhouse gas emissions from the manufacturing, power, waste, water and other sectors. The tax will increase to $50 to $80 per tonne by 2030.
Green talent needed in a fast-developing landscape
With these rapid developments in the sustainability landscape, we need more green talent to help firms and society make better decisions.
The Monetary Authority of Singapore and the Institute of Banking and Finance Singapore (IBF) have mapped out 12 skillsets for roles in sustainable finance. The skillsets include decarbonisation strategies management, climate change management, sustainability reporting and sustainable investment management.
“These skillsets will equip the sustainability executives with the knowledge to identify and solve problems. We hope the future generation will approach business decisions with a new mindset,” said Assoc Prof Zhang.
Training opportunities
This is why NUS Business School, in collaboration with SGFIN, launched the MSc in Sustainable and Green Finance programme. It gives pre-experience graduates a strong foundation in corporate finance, investment and economics of sustainability. In the capstone project, students will propose feasible solutions to real firms, gaining the practical experience of tackling sustainability challenges and discovering sustainability opportunities, even before graduation.
Busy executives can opt for shorter courses, learning how to make their business operations more sustainable and gaining the latest insights in the field.
Assoc Prof Zhang said, “For behavioural change to take place, we first need to gain awareness, knowledge, then skills. The demand for green skillsets and green talent is huge. Building up this skilled workforce for green economies in Singapore, Asia and beyond will take time. But the returns for the people, economies and the planet will be so much more.”