Climate Finance in Southeast Asia: Looking at the Private Sector

There have been reports of intense heatwaves across Asia this year, coming on the heels of the hottest year on record in 2023. The World Meteorological Organization also highlighted that Asia was the most disaster-hit region last year.

These statistics make for grim reading and add to the dilemma faced by Southeast Asia, one of the fastest growing regions in the world. It is likely to become the world’s fourth largest economy by 2030 with GDP of US$4.5 trillion. However, emissions are rising as well, from 1,038 metric tonnes (Mt) of carbon dioxide (CO₂) in 2010 to 1,429 Mt of CO₂ in 2018.

Acknowledging the challenge and supporting global cooperation under the Paris Agreement, ASEAN countries have committed to Nationally Determined Contributions (NDCs), which need significant investments. Climate Finance, which refers to the various sources of funding to support activities for climate adaptation and mitigation, thus assumes importance.

The World Economic Forum mentioned in January that the annual clean energy investment required in ASEAN is US$150 billion by 2030. But the region, excluding Brunei and Singapore, has only received US$56 billion in climate finance between 2000 and 2019. Private finance is expected to play a big part, increasing from 44 per cent of the total requirement in 2021 to 75 per cent by 2030.

… achieving the scale of investments … requires the region’s financial sector to adopt systems thinking – that is, to appreciate how different parts of a system are connected and affect each other. The sector also needs to collaborate across governments, multilateral organisations, regulators and private firms to attract investors.

Mobilising private capital, however, is not without significant challenges. The Monetary Authority of Singapore (MAS) found in its Financial Stability Review that banks are likely to face greater credit losses from an abrupt transition rather than a smooth transition to a net-zero carbon economy. Financial institutions with greater exposure to fossil fuels are susceptible to greater risks. Thus, assessing and monitoring climate risks becomes important, which currently is facing challenges of reliable data and the absence of standardised climate risk models. Equally challenging is the gap in transparency and standardisation in disclosure norms and regulations to meet investor needs and confidence.

Also, private capital investors in climate technologies require higher risk-adjusted returns as these are often in the nascent or conceptual stage and require longer time horizons for development, given the possibilities of failure.

Given this backdrop, what does ASEAN need to do to attract private finance? Some initiatives are already underway, particularly in blended finance. An example is the launch of Just Energy Transition Partnerships (JETP) 2022, where G7 government have made commitments of US$10 billion for Indonesia and US$8.08 billion for Vietnam. These amounts will be matched by similar amounts from private investors. Indonesia also launched the Global Blended Finance Alliance during its G20 Presidency. This will mobilise US$100 billion by 2027 for the country’s climate and Sustainable Development Goal efforts.

Regulators are playing attention in transition efforts, with the introduction of taxonomies for the region, such as the Singapore-Asia Taxonomy and the ASEAN Taxonomy. Both have a traffic light system, with an Amber category to classify activities which are not “Green” yet but are making efforts in transitioning their technologies. This will help financial institutions looking for standardised approaches to channel direct funding towards hard-to-abate sectors. Singapore has also introduced a mandatory climate-related disclosure requirement for SGX-listed companies from 2025. This will also apply to large unlisted companies from 2027. This will help investors looking for greater transparency.

Another recent development was the release of a Transition Strategy Toolkit for ASEAN Corporations jointly by Capital Markets Malaysia and the Climate Bonds Initiative (CBI). This toolkit will help firms incorporate the CBI’s Five Hallmarks to design a credible transition plan.  The third hallmark, which highlights a detailed implementation plan including specifics around expenditure for firms, will help to attract private investors looking for more granular insights.

While these are steps in the right direction, achieving the scale of investments mentioned earlier requires the region’s financial sector to adopt systems thinking – that is, to appreciate how different parts of a system are connected and affect each other. The sector also needs to collaborate across governments, multilateral organisations, regulators and private firms to attract investors. A recent development in Brazil is an example of such collaboration, where the Inter-American Development Bank (IDB), in collaboration with the government and the central bank, is offering foreign exchange derivatives to investors who are interested in funding Brazil’s green projects but are worried about currency risk. This initiative needs to be replicated in Southeast Asia, where currency exposure is a key risk for investors.

Another recent example of collaboration from the region itself is the early retirement plan for the Cirebon-1 Coal plantin Indonesia under the Asian Development Bank’s Energy Transition Mechanism programme, which is reported to have received financing support from private sector banks. The success of this case could catalyse greater interest from private financing sources in “transition credits” and help in the move to cleaner energy sources in a responsible manner.  Similarly, Climate Impact X, an initiative jointly developed by Singapore’s Exchange (SGX) and private sector participants, aims to become the primary trading hub in the Asia-Pacific region for voluntary carbon markets

Winston Churchill famously said, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” Frequent headlines on climate disasters, as well as the scale of the effort needed to keep the world on a 1.5°C pathway, can easily make pessimists out of the most committed optimists. However, Southeast Asian countries must look beyond the challenges and proactively engage with the private sector to ensure a sustainable future for its people.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of any organisation he belongs to or represents.

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