Could MAS’s Policy hit the dual targets of welfare maximization and sustainability? Definitely!

Climate-related risks have received growing attention from policy makers in recent years (Dikau and Volz, 2021; Muller, 2021), and central banks and other stakeholders within the financial sector are believed to be better able to promote a sustainability agenda through the use of various initiatives. This article reviews the latest initiatives by Singapore’s financial sector in promoting sustainability. Results show that the MAS has led the way and effectively transformed sustainability initiatives in the financial sector. For example, some of their initiatives include 1) the Green Bond Grant Scheme which promotes the issuance of green bonds; 2) the Green Finance Action Plan that aims to increase the resilience of the financial sector to environmental risks, develop green financial solutions, and leverage innovation and technology, and 3) the Green Investments Program to invest in funds with a strong green focus. In particular, the Green Finance Action plan includes the Green and Sustainability-Linked Loan Grant Scheme (GSLS) which encourages green and sustainability-linked loans (MAS, 2021a). For example, sustainability-linked loans encourage borrowers to achieve sustainability performance targets (SPTs) by aligning the loan terms to the borrower’s performance against these SPTs.

The study’s review shows that these initiatives are very promising, and bode well for the future of Singapore’s progress in terms of its sustainability agenda. In particular, the current approach from MAS to encourage sustainability-linked loans would likely contribute to Singapore’s advancement in sustainability, because it aligns principal and agent interests by using either the volume of loan provision or the loan interest rate as the key variable to incentivize enterprises to move towards cleaner production. Motivated by these initiatives by the banks, ACI’s paper titled ‘Sustainability‐Linked Monetary Policy: Theory and Singapore’s Initiatives’ further develops a stylized monetary policy framework that is linked to sustainability. The finding is that a sustainability-linked monetary policy (i.e., the sustainability-linked Taylor rule, or SLTR) will fulfill the dual mandate of welfare maximization and sustainability. This is because, via the SLTR, the financing costs for production will vary counter-cyclically with environmental conditions by incentivizing firms to reduce capital inputs, thereby reducing emissions. The table below reports the welfare gain associated with the policy regime switching from constant carbon (CC) tax/cap-and-trade policy (CT), to CC+SLTR (or CT+SLTR) when the economy faces a 1% productivity shock. In general, social welfare improves with the SLTR implemented. The welfare gains are equal to 0.005 percent of consumption in both scenarios.

The authors note that this research is only a primer of a series of studies on the role of the central bank in promoting sustainability, and that there is room for more studies on the subject, for example, by looking at the sustainability consequences of having a more detailed production network. These other important aspects are left for future research.

By Dawn CHOW


Dikau, S. and U. Volz (2021, June). Central bank mandates, sustainability objectives and the promotion of green finance. Ecological Economics 184, 107022.

MAS (2021a). Green and sustainability-linked loans grant scheme. Monetary Authority of Singapore.

Muller, N. Z. (2021, June). On the Green Interest Rate. Technical Report w28891, National Bureau of Economic Research.

Researchers: Ammu GEORGE, Jingong HUANG, Taojun XIE

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