Dealing with climate realities

This article was contributed to and first published in The Business Times on 21 February 2023.

While many may have expected this year’s budget to reveal further climate-related policy enhancements, let’s not forget that significant heavy lifting was already announced over the past few years – through the Singapore Green Plan 2030 and an aggressive increase in carbon tax, to name just two key planks.

Nevertheless, Deputy Prime Minister Lawrence Wong’s budget speech flagged how climate spending will “significantly” increase and mentioned a S$5 billion Coastal and Flood Protection Fund. As the ferocity of climate change becomes starker, it makes sense to confront immediate climate risks. The combination of climate adaptation and mitigation can allow us to prepare for the worst and achieve our sustainability ambitions.

Singapore has set a vision to become a leading centre for sustainable finance and carbon solutions in Asia and globally. While we have made headway, what more can Singapore do to stand out as a regional hub?

Sustainable finance, a vital part of the region’s decarbonisation and transition story

Various measures under the Monetary Authority of Singapore’s Green Finance Action Plan have helped lay a strong foundation for the development of a sustainable finance ecosystem here. Singapore itself has committed to issuing up to S$35 billion sovereign green bonds by 2030. The city state can seek to deepen its sustainable financing capabilities by fostering an enabling environment to scale sustainable finance in the region. This can include developing and implementing credible transition finance frameworks and taxonomies, two areas which the financial services industry is currently grappling with.

Refinements to capital risk charges with respect to green and sustainable finance may also help move the needle to deepen the market, including benefiting more small and medium enterprises (SMEs).

Singapore is also well-placed to be a regional blended finance hub bringing different stakeholders from the private and public sector together to fund and participate in climate-related projects, such as through means of risk-absorbing capital, guarantees, viability gap grants and project development funds. To bring this into play, the Republic can continue to double down on opportunities to work with neighbouring governments and be part of their sustainability value chain – for example, by supporting their renewable energy developments which in turn can help address Singapore’s rising energy demands. Expanding our role in blended finance can also help support the region in much-needed adaptation measures.

Opportunities to lead in climate tech

Technology solutions, such as those centred on carbon capture, removal, utilisation, and storage, can help accelerate the energy transition. Offering incentives for early-stage investments into climate tech solutions can create value and impact where it matters most.

The newly introduced Enterprise Innovation Scheme offers a 400 per cent tax deduction for the first S$400,000 of qualifying costs such as R&D, IP acquisition, registration and licensing, and training costs. Businesses may opt to convert the tax deductions into cash, with the cash payout capped at S$20,000 a year. Encouraging early-stage investments into climate tech solutions can strengthen Singapore’s global relevance in sustainability.

To further encourage ESG-linked businesses large and small throughout the environmental, social and governance (ESG) value chain to set up shop in Singapore, while nudging local companies towards greener solutions, Singapore can consider an ESG-conducive tax incentives and grants regime.

Currently, tax incentives such as the Development and Expansion incentive (DEI) and Global Trader Programme (GTP) offer concessionary tax rates of 5 per cent or 10 percent to qualifying companies. While these incentives are broad enough to cater to ESG businesses, in many cases ESG firms may not fit squarely within these schemes due to their business model and size. These tax incentives could be more flexible. Their eligibility thresholds should be suitably adjusted to support desired ESG businesses such as carbon credits/offsets traders, exchanges, brokers and other sustainable solutions providers.

Furthermore, while grants relating to ESG businesses are already available, these tend to be focused on encouraging investments to improve energy efficiency. It would be helpful if the grants could be expanded to support broader ESG ecosystem development such as ESG measurement, reporting and training. While there is good support through the Enterprise Sustainability Programme to help organisations kickstart their sustainability efforts, businesses need more support to develop capabilities related to carbon measurement, decarbonisation and sustainability reporting.

Given the complex nature of sustainability issues, including the sector specificities, it would be timely to introduce more granular and tailored training to help build capabilities across sectors, enabling new jobs and roles.

With the ambiguities in navigating the ESG space, businesses would welcome certainty and stability in the tax environment, which Singapore can offer. For example, the amendment made to the GST treatment of a sale of carbon credits (from 7 percent GST to no GST) in November 2022 and the related clarifications published by the Inland Revenue Authority of Singapore (IRAS) provide certainty and clarity which businesses appreciate (notwithstanding that many had hopes for a zero-rated GST treatment which would allow GST on expenses to be fully claimable). Meanwhile, there remains ambiguity on the GST treatment of other ESG-related instruments such Renewable Energy Certificates (REC) and the related Contract for Differences. To this end, there remains scope for further policy and legislative review to finetune the GST treatment.

While companies may find it hard to navigate tax incentives and grants, the good news is studies have proven that these schemes can lead to a win-win of decarbonisation plus the added bonus of improving profits. They should also help to improve the overall bankability of green projects.

Amidst the international push towards a global minimum tax, ESG-related grants are particularly relevant as there is potentially less scope to use tax incentives to attract new ESG-linked investments and strengthen the city’s ESG ecosystem.

Concluding thoughts

Singapore has been ambitious in its sustainability efforts despite the pandemic crisis. To continue to maintain its leadership in sustainability, continual policy calibrations will be needed to respond to changing environmental, society and economic needs. Maintaining our sustainability hub leadership is key and so we look forward to further details during the Committee of Supply debates.