In recent decades, a significant shift toward environmental and social consciousness has driven financial investors to focus on responsible investments (RI), leading to the growth of sustainable finance. This approach emphasises long-term value creation and sustainable development over short-term financial gains, incorporating environmental, social, and governance (ESG) factors into investment decisions. With an expanding toolkit that includes green bonds and ESG funds, sustainable finance offers investors versatile options to align their portfolios with their personal values and support the causes they believe in.
In Singapore, the Monetary Authority of Singapore (MAS) has been laying the groundwork for sustainable finance, beginning with the Environmental Risk Management guidelines to help organisations manage environmental risks. Initiatives like the Green Finance Industry Taskforce (GFIT) and its accompanying grant scheme further incentivise the development of green finance products, solidifying Singapore’s role in this sector.
One notable growth area is the rising number of family offices in Singapore. A recent report by The Straits Times highlighted how these private establishments are increasingly funding nature conservation projects. DBS Bank research confirms that family offices are “embracing impact investing as an extension of their philanthropic efforts to support social and environmental causes” and this trend contributes to Singapore’s broader aim of becoming a net-zero economy.
Deputy Chairman of MAS, Mr. Chee Hong Tat, reinforced this point at the Global-Asia Family Office Summit in September. He emphasised that family offices' interest in philanthropy can be a powerful force for sustainability, citing the Ishk Tolaram Foundation and Tsao Foundation as prime examples of family offices supporting vulnerable minority groups. These efforts demonstrate how sustainable finance can drive both financial resilience and sustainability for the future.
But Is Sustainable Finance Just A Fad?
Despite the growing momentum behind sustainable finance, some sceptics argue that it may be just another trend, likening it to “greenwashing”, where companies market themselves as environmentally friendly without making meaningful changes. Much of this scepticism is rooted in the evolving nature of ESG metrics, which are still under development and applied inconsistently. This lack of standardisation creates ambiguity around what truly qualifies as sustainable.
Additionally, critics question whether the growing focus on ESG criteria is driven by societal pressure to conform in a "woke" world. Some argue that these criteria may limit investment returns, as investors might have to avoid traditional yet profitable sectors like oil and gas due to their environmental controversies.
However, there are strong indicators that sustainable finance is more than just a passing fad. The expanding landscape of ESG tools and the increasing involvement of institutions like family offices in impact investing suggest that responsible investing is here to stay, driven by a growing recognition of its long-term value in addressing global environmental and social challenges.
An Undeniable Upward Trajectory on All Fronts
However, there are strong indicators that sustainable finance is more than just a passing fad. The expanding landscape of ESG tools and the increasing involvement of institutions like family offices in impact investing suggest that responsible investing is here to stay, driven by a growing recognition of its long-term value in addressing global environmental and social challenges.
Despite some reservations, the numbers are proving hard to ignore. According to Morgan Stanley, sustainable funds generated median returns of 12.6%, almost 50% outperforming the 8.6% returns of traditional funds. This, when combined with the positive sentiments and aspirations it is based on, makes sustainable finance a trend that is here to stay. Besides the compelling market performances, other factors that will further contribute to this growth include:
A Shift in Investor Demand: As millennials and Gen Z investors begin to dominate the market, their values and priorities are steering a growing preference for ethical and sustainable investing. This trend is further fuelled by increasing public awareness, activism, and global initiatives like the Paris Agreement and the United Nations' Sustainable Development Goals, and the ‘Great Wealth Transfer’. With these younger generations poised to inherit trillions of dollars, their investment choices will significantly influence the financial landscape. In response to this shift, there is a rising number of professional programmes offering financial practitioners training in sustainable finance to meet this growing demand.
The Benefits of a Long-Term Focus: Sustainable investing encourages a long-term perspective, which aligns with broader objectives such as reducing risk and fostering resilience in the face of systemic challenges like climate change and inequality. In an increasingly volatile world, this strategy offers a way to balance disruptions, making sustainable finance a form of risk mitigation that enhances portfolio durability. It also presents an opportunity for financial advisors and investment platforms to offer sustainable options and guidance, meeting the demands of a rapidly evolving world.
Establishing Corporate Accountability: Companies that overlook ESG factors are increasingly exposed to reputational risks. In today’s digital age, transparency is crucial—any missteps can quickly go viral, causing significant damage to a brand's image. Offences are harder to remedy, and businesses that fail to address environmental or social concerns often face public backlash and boycotts, which can directly diminish shareholder value. By integrating ESG standards into their operations, companies not only protect themselves from such risks but also demonstrate proactive efforts to address these concerns. With ESG gaining more momentum, professionals in banking and finance feel the need to understand concepts better to drive sound decisions for their own organisations and businesses.
Moreover, governments worldwide are enforcing stricter regulations to promote sustainability and ensure future readiness. For instance, the U.S. Securities and Exchange Commission (SEC) has heightened its scrutiny of ESG disclosures, increasing pressure on organisations to adopt sustainable business practices for greater corporate accountability. This trend underscores the importance of sustainable finance in shaping the future of responsible business and green infrastructure and technology. Even small and medium enterprises (SMEs) are starting to feel pressure from clients and consumers to redefine their business vision to include sustainability goals and kickstart their sustainability journey and reduce their carbon footprint. When it comes to engineering designs and manufacturing practices, it is also important to explore ethical considerations in design processes, resource-efficient manufacturing, and sustainability strategies.
A Global Movement
In Singapore, signs of this ethical direction can be seen in its policies as well as the creation of projects like the Singapore Green Finance Centre. All designed to shape Singapore into a leading green finance hub, there are also growing training options to groom talents on topics ranging from building climate-resilient businesses to mastering the concepts of biodiversity for businesses and societal benefit. More importantly, professionals entering this industry must understand the fundamentals of sustainable investment.
The shift towards sustainable finance is not limited to Singapore either. In Asia, for example, Japan’s Government Pension Investment Fund - the world’s largest - has shown an encouraging performance since it started in 2017. Meanwhile, in the United States, US$8.4 trillion worth of sustainable investment assets were identified in 2022, and continues to grow.
Even the World Economic Forum (WEF) has placed sustainable finance at the core of its agenda, with major economies like China and India making commitments to achieve net-zero carbon emissions by 2060 and 2070, respectively. These global initiatives ensure that sustainable finance is truly an international effort.
For the Aspiring Green Finance Professionals
If you are a financial professional looking to incorporate sustainable finance into your portfolio or transition entirely into the industry, here are some pointers to consider and ease your way in:
Stay Informed: As mentioned earlier, ESG regulations remain relatively young and are thus evolving very rapidly as institutions standardise the metrics and expand upon sustainable investment products. Stay updated on policy changes in the markets and investigate the impact of changes for your business constantly to stay compliant and activate opportunities. Enrolling in professional courses focused on ESG and sustainable finance can also give you a competitive edge and insight from industry experts.
Understanding Materiality: Not all ESG factors carry equal weight across industries. Investors should focus on the ESG issues most material to the sector they are targeting. For instance, governance plays a critical role in the finance sector, while environmental concerns dominate energy investments and sustainable built environment practices affect the real estate and technology sectors. Additionally, there are less tangible elements like fostering workplace diversity and promoting inclusive policies that ensure equality and fairness. It's not always about metrics; ethical practices and social considerations also hold significant importance.
Leveraging Data Tools: The rise of FinTech has revolutionised the finance industry, and its impact extends to sustainable finance. One of the major challenges for sustainable finance is accurately measuring and reporting ESG criteria. Technology, through innovations in AI, big data analytics, and blockchain, is transforming how ESG performance is tracked. These tools provide unprecedented levels of transparency, security, and accountability, enabling investors to make informed decisions and ensuring that sustainability claims are accurate and verifiable.
Sustainable Finance: A New Norm
Sustainable finance is more than just a passing trend. With increasingly defined regulatory frameworks, growing investor demand, ethical advancements, and technological innovations that enhance the accuracy of ESG measurement, it is becoming an integral part of modern finance. This shift reflects a broader understanding of the interconnectedness of financial, social, and environmental well-being. As awareness and demand for sustainable investments continue to rise, this movement is likely to accelerate, driving significant change across the global economy and contributing to a more sustainable future.
Join the growing movement of businesses driving positive impact and explore sustainable finance programmes at SMU Academy.
