An Overview of the Path to Decarbonisation in Singapore – What Does it Mean for Companies and Investors
(This is an authorized repost of https://inc-law.com/an-overview-of-the-path-to-decarbonisation-in-singapore/)
It’s a race against time in preserving Mother Earth for our current and future generations. Countries around the world have more recently stepped up in their collective efforts and commitment to decarbonise the world and support sustainable practices, including Singapore. This is indeed an exciting environment for both companies and investors to watch as the Singapore Government ramps up its efforts to achieve its net-zero targets by 2050.
Some of the interesting initiatives by the Government range from its push to explore the viability of decarbonisation technology including green hydrogen, to its roll-out of “Project GreenPrint” to address the current challenges that corporations and investors face in accessing good data on sustainability. These changes towards a green economy will inherently be key in influencing the future of investments and transactions.
Decarbonisation Technology
On the technology front, Singapore is looking to direct funding towards research, projects and building infrastructure for the safe import, storage and utilisation of green hydrogen as part of its decarbonisation efforts. Singapore aims for hydrogen to generate up to half of the country’s power by 2050 if made possible by technological advances as well as the economic viability of low-carbon technologies.
The Energy Market Authority is also looking towards low-carbon electricity imports into Singapore and the development of more solar farms. These initiatives are definitely steps in the right direction towards securing Singapore’s sustainable green energy supply for the future.
ESG Governance and Sustainability Framework
In the regulatory and public policy spheres, Singapore has in recent years signed up to several global partnership coalitions as a Government partner, committing to both quantitative and qualitative targets to achieving a greener economy. Some of the new coalitions which Singapore joined this year include the First Movers’ Coalition where global partners commit to create early markets for clean technologies in emissions-intensive industries, the Forest and Climate Leaders’ Partnership, and the Joint Declaration from Energy Importers and Exporters on Reducing Greenhouse Gas Emissions from Fossil Fuels. As such, we can expect further regulations and legislations in support of Singapore’s commitment to creating a green economy.
To that end, successful businesses are quick to recognise that ESG (Environmental, Social and Governance) is not simply a responsibility to comply with a “checklist” of legislative requirements. Quite the opposite, companies capitalise on their strong ESG governance to attract untapped investors in the ESG space which increasingly require target companies to comply with voluntary guidelines and make voluntary disclosures. Companies are therefore incentivised to maintain good ESG governance to attract investors.
To achieve a meeting of minds between companies and potential investors, it is imperative for a wider consensus on industry-defined standards of “sustainability”, so that companies can formulate their ESG goals effectively and accordingly, investors can make more informed decisions about sustainable investments. That said, the lack of standardised taxonomies in defining the concept of ESG remains one of the key challenges which both companies and investors face. Another challenge is the lack of accessibility to reliable, streamlined ESG data of individual companies, which inadvertently perpetuates instances of corporate greenwashing.
In response to the above challenges, Singapore has implemented a wide array of initiatives targeted at improving the ESG disclosure framework and creating a trusted “green data” ecosystem to benefit both publicly listed companies, as well as private companies in Singapore.
For instance, as part of Project GreenPrint, the Monetary Authority of Singapore (“MAS”) and Singapore Exchange (“SGX”) launched ESGenome this year which provides a common digital disclosure platform for SGX-listed companies to report ESG data in a simple and structured manner, and generate sustainability reports. Through ESGenome, investors are able to easily access and effectively compare consistent ESG data to support their investment decisions.
MAS has separately launched ESGpedia this year, which is a registry of ESG certifications and globally verified data of companies across various sectors, to facilitate effective ESG financing by financial institutions and investors.
Integrating ESG Elements into Transactions
With an increasing consciousness to ESG disclosures and compliance, more investors are extending their due diligence coverage to environmental aspects of a target company which may reveal any potential ESG risks, depending on the industry and jurisdiction in which it operates. If a company does not have in place a reliant system to collect ESG data, obtaining quantitative ESG data will be challenging. In such circumstances, internal engagement with the management of the company is crucial in conducting a qualitative ESG due diligence exercise.
These ESG gaps are then filled in by including the due diligence findings into investment agreements, through a range of tools including, but not limited to, ESG-oriented representations and warranties tailored to the company’s business and sector. These representations and warranties may not only address the company’s compliance with mandatory ‘hard laws’, but could also incorporate ‘soft laws’ such as voluntary third-party guidelines and standards which are in line with the investors’ goals. Examples of such third-party standards include the United Nations (“UN”) Sustainable Development Goals as well as recommendations published by the Task Force on Climate-Related Financial Disclosures (“TCFD”) and the International Sustainability Standards Board (“ISSB”).
If there are any ESG risks that cannot be rectified before completion, investors may seek an indemnity against the company for any losses suffered as a result of such risks, or an undertaking by the company to rectify them.
Post-completion, investors may work together with founders to improve the company’s governance and management of ESG risks through quality disclosures, regular reporting on how the company is complying with ESG principles, and the implementation of effective ESG policies. Investors are geared towards value creation and envisioning ESG trends, so they could also set tailored ESG targets to be achieved by the company within stipulated timeframes. All of the above may be included as covenants under the transaction documentation.
At this juncture, it would be opportune to highlight that as part of the Venture Capital Investment Model Agreements (VIMA) (version 2.0), which is a set of template documentation catered to venture capital investments in Singapore, sample ESG-related provisions have now been laid out in an ESG letter that serve as a starting point for negotiation. Having all ESG-related obligations consolidated in a single document is also advantageous as it facilitates more effective negotiations between the parties.
“ESG” is more than a Buzzword
As a concluding remark, companies and investors alike should position themselves and prepare for a global green economy, and proactively create ESG-oriented targets or seek out ESG-oriented businesses. ESG audits and disclosures are not simply another box-ticking exercise, but should rather be viewed as tools to enhance a company’s ESG score as another vital metric of its success.
We have the expertise and knowledge to guide you through an evolving ESG regulatory landscape amidst a paradigm shift in corporate sustainability. Whether you wish to understand more about how to improve your business’ ESG governance, or manage ESG risks in your investments through a due diligence and M&A process, please reach out to us.
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Author: Candice Yong