Southeast Asia has all the attributes needed to become a key market for sustainable finance. However, more needs to be done to address the region’s contribution to climate change, not least because its own people will suffer grievously from its effects if actions are not taken quickly at scale in this ‘decade of action’. Given the region’s ambitions and potential to develop sustainable industries – and the progress its companies have already made on issues such as social and governance aspects of sustainability – there is no reason why it shouldn’t lead in this area.
Yet as we’ll discuss in this blog series, Southeast Asia’s banks aren’t sufficiently advanced to address the challenges and seize the opportunities. We’ll set out what steps they can take now to upgrade and help the region realise its sustainable finance potential.
ASEAN could be a green superpower
The 10 members of the Association of Southeast Asian Nations (ASEAN) represent 640 million consumers, and if ASEAN were considered as a single unit it would be the world’s fifth-largest economy. Though diverse, it’s not unreasonable to view the bloc as one unit, given its ongoing progress towards formal market integration.
Moreover, ASEAN’s economic prospects appear bright. Between 2007-17, its economy more than doubled in size, from $1.3 trillion to $2.8 trillion. The IMF expects the bloc’s five largest economies to grow by 2.9% this year and by 5.8% in 2022, after a shallower 2020 recession than those recorded in peer economies such as India and Latin America.
The region is vulnerable to the effects of climate change. It accounts for 16% of the world’s coastline, including the world’s two largest archipelagos in Indonesia and the Philippines, with hundreds of millions of people living in coastal communities that face direct physical risks from rising sea levels. However, the region is also ambitious in its plans to combat the threat: All 10 ASEAN states are signatories to the Paris accord, ASEAN has committed to make 23% of its primary energy renewable by 2025, and 26 major cities across the region have been chosen to pilot smart-city programs that means they use resources more efficiently.
But there is a big gap between aspirations and reality. The IEA notes that Southeast Asia is one of the few regions where demand for coal has been rising. It is also a major source (and victim) of oceanic plastics pollution, it lags behind in waste-water treatment, and its greenhouse gas emissions are increasing rapidly.
A necessary transition
There are a number of areas in which Southeast Asia offers huge potential for sustainable investment:
- Geothermal power is one of the greenest forms of energy. Indonesia and the Philippines, respectively ASEAN’s largest and third largest economies, are already the world’s second- and third-largest producers of geothermal power after the United States. Yet much remains untapped – at 29 gigawatts, Indonesia’s geothermal power potential is the largest in the world. Presently, installed geothermal generation capacity is less than 10% of that potential.
- Southeast Asia’s equatorial geography makes it an ideal place to capture the sun’s rays. The pace of solar expansion in some countries is breathtaking – in the space of last year alone, Vietnam installed 9.3 gigawatts of solar generating capacity, a 25-fold increase on the year before. Elsewhere in the region, a variety of major solar projects now underway, including floating solar that takes advantage of the region’s extensive coastline.
- Wind power. That long coastline creates another green opportunity – Vietnam’s government has announced plans to foster the rapid growth of offshore wind, complementing the simultaneous development of onshore wind.
- Blue carbon. Southeast Asia’s coastal ecosystems are increasingly recognised as a crucial carbon sink, a valuable function that can be financialised. Planting new mangrove forests can capture three to five times more carbon than planting trees on dry land. “Blue carbon” credits and offsetting are a logical growth area for the region’s financial economy.
- Smart cities: ASEAN’s smart cities initiative is encouraging the uptake of technology that could rapidly improve air quality and reduce resource consumption in the region’s major urban areas. Catalysing bankable projects with the private sector is a specific feature of the program.
- Food security: ASEAN was badly affected by a food price crisis in 2008, and since then the region has worked to improve its resilience. The application of new “smart farming” techniques, real-time monitoring systems, digital market places and digital supply-chain traceability approaches are sectors that could qualify for sustainable investment.
When it comes to the energy transition, then, Southeast Asia offers both the potential for change and a good illustration of the need for it. Left unchecked, climate change will reduce the region’s GDP by 11% by the year 2100, forecasts the Asian Development Bank (ADB). But change requires financing. Are the region’s banks in a position to help it seize its sustainable finance potential?
Ready to finance change?
There are undoubtedly sizeable business opportunities for banks and investment management firms in financing green growth in the region, not least in meeting the growing demand from companies, investor expectations, customer preferences, and regulatory pressure to enable the transition.
The ASEAN region by September 2021 had 67 signatories to United Nations Principles for Responsible Investment, while 80% of the top asset managers in Singapore are also signatories, according to the Monetary Authority of Singapore (MAS). The ASEAN Capital Markets Forum is also establishing new financial capital market rules that promote sustainable investments and transparency.
Moreover, the sustainable finance market is showing steady growth in the region despite the impact of COVID-19. ASEAN issuance of Green, Social and Sustainability bonds and loans reached USD12.8 billion in 2020, up 5.2% year-on-year, according to HSBC.
Regional and local banks are beginning to look at ways they can drive the decarbonization of societies, and are being supported by regulators, governments and multilaterals. The ASEAN Catalytic Green Finance Facility, for example, is co-owned by the finance ministries of the 10 member states and by the ADB, and seeks to finance green solutions to the region’s $100 billion-a-year infrastructure deficit.
Sustainable finance is also gaining traction across the broader Asia Pacific (APAC) region. Accenture commissioned Forrester Consulting to conduct a survey with 267 decision makers and influencers on sustainable finance initiatives in APAC. It found that a third of financial institutions in the region are seeking to launch sustainable finance products, though with banks much more likely (42%) to say this than insurers (25%). Some regulators are supporting them, with Singapore’s MAS launching green and sustainability-linked grant schemes.
But within Southeast Asia, have intentions transformed into actions? Are regional banks getting on board? In our next blog, we take the temperature of the region’s banks and their progress on sustainability and consider what separates the leaders from the pack.
Disclaimer: This content is provided for general information purposes and is not intended to be used in place of consultation with our professional advisors.
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