Mobilising capital for ASEAN’s just energy transition
While Southeast Asia’s shift to a more climate friendly economy will require enormous amounts of capital, this must be deployed prudently in both developed and emerging economies, to ensure the region’s net zero agenda delivers equal benefits and opportunities for all.
It is a given that for the world to meet its net zero ambitions, countries globally must rapidly decarbonise over the coming decades. More than 90 nations have already announced net zero emissions targets, with a majority of these having committed to the status by 20501. Nine of the 10-member Association of Southeast Asian Nations (ASEAN) have pledged to reach net zero by or around the mid-century2.
While there are many factors for policy makers to consider as they ramp up their climate action efforts, two interlinked concerns loom. How will governments raise the enormous amounts of capital needed to fund green projects? And how can they ensure a just transition so emerging markets, including those in ASEAN, have the same opportunities to access capital for resilience and adaptation?
Each concern is particularly acute. The trading bloc requires an additional USD100 million a year in private capital to finance the capabilities it needs to get to net zero3, especially given that government funds alone are insufficient to meet its requirements. This shortfall is part of a wider worldwide challenge: Standard Chartered’s “Just in Time”4 report finds that emerging markets require a total of USD94.8 trillion in order to meet their global climate targets5.
Equally as challenging is that across Asia, coal remains a significant employer and source of revenue for local municipalities6. The Asian region is the coal industry’s biggest employer globally, and in provinces like Indonesia’s East Kalimantan for instance, up to 8 per cent7 of its 3.77 million population8 in 2020 – close to 301,600 people – work in the coal industry.
At this year’s ASEAN Climate Forum held in Jakarta, financiers, policy makers and business leaders from a wide range of international organisations shared their vision for accelerating ASEAN’s just energy transition. Chief among the convictions shared were three driving principles. First, the need to pool capital from a wide range of financiers, both public and private. Second, to instil a collaborative and inclusive approach, where the views and needs of all stakeholders are heard and form part of the solution. And third, to introduce robust policies and standards that are aligned among each ASEAN member country.
More financiers needed
According to Andrew Chia, Cluster CEO of Indonesia and ASEAN Markets (Australia, Brunei and the Philippines) at Standard Chartered, more should be done to accelerate the transition to net zero through strong public-private collaboration.
It is therefore imperative that the trading bloc takes a top-down approach, starting at the governmental level, says Chia. Individual countries must establish very clear disclosure requirements, and clear transition pathways, which on one hand are cross-sector, and on the other hand relatable to individual industries.
To encourage further investment, governments could incentivise banks through favourable pricing, preferential treatment for capital, and through mechanisms such as grants. They should also tap into the enormous amount of private wealth managed in the region, as private and high-net-worth investors are increasingly focused on making a social impact and aligning their philanthropic endeavours to sustainability causes.
All players must work collectively, be it the private sector, multilateral development banks or philanthropy, Chia adds. Moreover, such entities need to start small with their investments. Once they start seeing success, this should lead to greater participation in future. He cites Indonesia’s Just Energy Transition Partnerships (JETP), which saw an initial USD20 billion mobilised to fund net zero energy projects. USD10 billion will be provided by public sector institutions, with a further USD10 billion coming from private sector financial institutions9.
Ensure project bankability
To attract capital, bankability of projects is essential, Chia affirms. If a financier is unable to recognise a project’s commercial viability, it is highly unlikely that they will invest in it.
For initiatives that can demonstrate their bankability, there are several tried and tested instruments that could be leveraged to successfully attract capital. These include green bonds and sustainability bonds; ESG funds; and public-private-partnerships, which leverage the financing capabilities of private players, public sector organisations, and multilateral developmental organisations, a combination known as blended finance.
Complementing these, ASEAN can also benefit from novel financing mechanisms. For example, with an increase in the frequency of extreme weather events like flooding, typhoons, and droughts10, disaster finance is becoming an important part of the trade bloc’s climate financing framework, explains Kensuke Molnar-Tanaka, Head of Asia Desk at the OECD Development Centre. Catastrophe bonds are one such form of disaster finance. Issued predominantly by insurance companies, they pool private capital, which is in turn deployed to fund the rebuilding of towns and cities in the wake of natural disasters.
Retain jobs and livelihoods
The world’s efforts to mitigate extreme weather events, by striving to achieve net zero immediately, could in the near-term prove detrimental to communities and economies. For example, Indonesia, Malaysia, Brunei, Vietnam, and Thailand are noteworthy producers of hydrocarbons11, and by cutting off industry financing, not only will workers lose income, but local economies will suffer as well. The same can be said for workers and municipalities in Indonesia, who rely on coal production for income and power generation; and communities and businesses in Vietnam and the Philippines, who are also dependent on coal power12 to meet their electricity needs.
Instead of exiting fossil fuels completely, Jiro Tominaga, Country Director of ADB Indonesia suggests that financiers work with all stakeholders to instil and oversee transition plans that on one hand, chart a course to net zero, while on the other hand ensure that people and municipalities receive an income.
The credibility of these plans is key to assessing their viability for transition financing, notes Yuki Yasui, Managing Director of the Asia Pacific Network at the Glasgow Financial Alliance for Net Zero (GFANZ). To assess the credibility of projects, financiers should examine their respective government’s transition roadmaps, and the plans of their developers; and consider their participation in carbon markets, among others.
Instil robust pan-ASEAN policies
For Patrick Suckling, Managing Director and Asia Chair at Pollination, robust policies supported by strong regulation and internationally acclaimed standards, are critical to the viability of all initiatives. Singapore’s carbon tax exemplifies such an approach. The tax will be raised from S$5 per carbon dioxide equivalent (S$25/tCO2e) in 2023 to 25/tCO2e in 2024; to S$45/tCO2e in 2026; and to S$50-80/tCO2e by 203013. By having a clear roadmap, companies in high-emitting industries can make the necessary investments to lower their emissions and overall carbon footprint, while financiers can gauge the bankability of projects, considering their exposure to this tax and mobilise green capital accordingly.
Ensuring that policies, regulation, and standards are harmonised regionally is also essential, asserts Edo Mahendra, Head of JETP Secretariat Indonesia. Better synchronisation between ASEAN member nations will improve the trading environment for both companies and financiers. It could in turn smoothen cross-border transactions, uphold standards, encourage transparent reporting, and strengthen investor protection. It may also lessen the likelihood of arbitrage between different markets.
The trading bloc should also seek to align its standards with those implemented elsewhere. For example, the ASEAN Taxonomy for Sustainable Finance14, a classification system that outlines environmentally sustainable investments, was recently modified to better align with the EU Taxonomy for Sustainable Activities. This alignment makes sustainable investment decisions easier for players active in both markets and encourages investors in one market to enter the other.
Upskill and increase capacity
The newness of the green economy means that there remains a significant knowledge and skills shortage. This is currently one of the largest risks threatening to derail ASEAN’s net zero goal, believes GFANZ’s Yasui.
Helping financial institutions to build capability in this field is a key strategic priority for the GFANZ Asia-Pacific (APAC) Network, of which Standard Chartered is a founding member. GFANZ is a group that brings together the APAC financial sector to accelerate an inclusive and just transition to net-zero15.
Once ASEAN addresses these near-term shortfalls, the opportunities for financiers, policy makers and companies should be plentiful, lauds Standard Chartered’s Chia. With 92% of the global economy committed to achieving net zero16, and with 89% of the population living in such markets17, the energy transition will continue to create new opportunities.
The region’s willingness to evolve bodes well for its prospects. ASEAN’s collective commitment to net zero underscores the trading bloc’s aspiration to be front and centre of the new, global green economy for decades to come.
1 https://www.wri.org/insights/countries-taking-action-reach-net-zero-targets
2 https://www.irena.org/News/articles/2023/Feb/ASEANs-Dash-to-Net-Zero-Finishing-Line-Aided-by-IRENA
3 https://www.adb.org/what-we-do/funds/asean-catalytic-green-finance-facility/overview
4 https://www.sc.com/en/insights/just-in-time/
5 https://www.sc.com/en/feature/leading-charge-towards-net-zero-transition/#:~:text=To%20get%20to%20net%20zero,going%20by%20Standard%20Chartered’s%20research
6 https://www.iea.org/reports/coal-in-net-zero-transitions/executive-summary
7 https://www.iea.org/reports/coal-in-net-zero-transitions/executive-summary
8 https://kaltim.bps.go.id/pressrelease/2021/01/21/851/sensus-penduduk-2020-mencatat-jumlah-penduduk-kalimantan-timur-sebanyak-3-77-juta-jiwa.html
9 https://www.aseanbriefing.com/news/indonesias-just-energy-transition-partnership/
11 https://www.offshore-technology.com/data-insights/top-ten-crude-oil-producing-fields-in-south-east-asia/?cf-view
13 https://www.nccs.gov.sg/singapores-climate-action/mitigation-efforts/carbontax/
14 https://asean.org/wp-content/uploads/2023/03/ASEAN-Taxonomy-Version-2.pdf