Discovering untapped sustainable finance opportunities towards green recovery in ASEAN

This op-ed is part of AASYP’s Digital Dialogues 2021, which is a programme that aims to provide a platform and forum for future leaders from across the region to contribute to the policymaking and diplomacy sphere by engaging in issues relating to Gender and Diversity, Green Recovery, and Emerging Economies.

ASEAN is highly exposed to the impacts of climate change. According to a study conducted by the Centre for Strategic and International Studies (CSIS), 77 percent of people living in Southeast Asia along the coast or in low lying river deltas will be threatened by rising temperature and sea levels. Climate change concerns, coupled with the impact of the COVID-19 pandemic, have increased initiatives by ASEAN governments to ensure recovery is achieved with a green and sustainable approach. A transition is slowly underway to replace grey and brown sectors – those with negative impacts on the environment – to greener business processes, products and services  with a lower carbon footprint. While this will cause disruptions in several sectors, it will also create sustainable finance opportunities towards green recovery in the long term.

Adopting Environmental, Social and Governance (ESG) principles is a challenge in the region as countries continue to be heavily dependent on fossil fuels for energy. As such, regional collaboration is required to address the reliance on non-renewable energy sources. In this regard, development of the ASEAN Taxonomy of Sustainable Finance (ASEAN Taxonomy) is timely as it will serve as ASEAN’s common language for sustainable finance and account for both international goals and ASEAN’s specific needs. Tackling climate change through the finance industry is a pragmatic move as the financial system is a single, efficient window into the economy which is closely regulated. 

The Asian Development Bank (ADB) has estimated that Southeast Asia’s climate-resilient infrastructure financing needs amount to $210 billion per annum between 2016 and 2030. The financing gap is estimated at 50-60 percent of the target, possibly more with the COVID-19 pandemic’s impacts. According to a report by the ASEAN Working Committee on Capital Markets Development, setting clear rules would help the region of 650 million people to capture green financing opportunities that could be worth $3 trillion between 2016 and 2030.  

ESG initiatives play a pivotal role in managing climate change risks, apart from being an integral part of the sustainable finance industry to ensure responsible investments. With ESG criteria shaping the global corporate agenda, ASEAN presents several opportunities for investors where green infrastructure will reinforce environmental developments, alternative financing will support social impact and enhanced governance will enable a coordinated recovery from the economic consequences of the pandemic. Developing green financing instruments such as green loans or bonds, or risk mitigation tools such as green guarantees and insurances, will be vital in achieving green recovery. 

According to Sustainable Energy for All (SEforAll) estimates, renewable energy projects alone can add $25 billion to the annual gross domestic product (GDP) and generate 1.7 million jobs by 2030 in ASEAN. These projections are based on the ASEAN target of investing $27 billion a year to achieve a 23 percent share for renewables in the energy mix by 2025. The ASEAN region has seen a significant increase in the issuance of green, social, and sustainable bonds and loans, reaching $12.1 billion in 2020, according to the Climate Bonds Initiative. But the market still has much room to grow. This opportunity represents a new ASEAN green investment market 37 times the size of the global 2016 green bond market.

Another initiative to realise green recovery is the ASEAN Catalytic Green Finance Facility (ACGF) which mobilises investments in green infrastructure that promotes clean energy, sustainable urban transport, water supply and sanitation, waste management, and climate-resilient agriculture. Under the ACGF, the Green Recovery Program was put in place to support such investments as part of COVID-19 recovery measures by using innovative green finance instruments. The Green Recovery Program will support 20 green infrastructure projects in ASEAN member countries worth more than $4 billion. According to estimates, these projects are expected to reduce carbon dioxide emissions by 119 million tons and create 340,000 green jobs in 30 years in key sectors such as sustainable transport, renewable energy and energy efficiency systems, also low-carbon agriculture and natural resources. 

By establishing strong regulations around sustainable finance initiatives and ensuring corporations commitment to the ESG initiatives, there will be climate change opportunities to be explored without the detriment of the wellbeing of the people and environment. Additionally, the Green Recovery Program will help ASEAN countries bridge a significant gap in financing green infrastructure, with the region’s annual investment needs estimated to be $210 billion even before COVID-19. Due to the pandemic, the gap is likely to have widened, as the region’s economy contracted by 4.4 percent  in 2020, according to ADB. 

Thus, additional investment bridging is needed to supply the new capital flows needed for climate-resilient infrastructure that can withstand the climate-driven shocks to come, in addition to meet SDG-based goals for ASEAN nations. By supporting the green recovery initiatives through financial instruments, ASEAN nations will be better placed to attract long-term capital and prepare economies for a low carbon, climate resilient future.

This article was written by Jasminder Kaur, edited by Lutfil Azmi, and reviewed by the AASYP Publications Team.

Note: The views and opinions expressed in this op-ed are solely those of the writer and in no way represent nor reflect the position of AASYP and members of the AASYP Publications Team. The AASYP Horizons Blog provides a platform for the free expression of opinions and intellectual discourse.

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