Unlocking private capital for ASEAN’s green transition
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It is well established that private capital needs to bear the heaviest burden when it comes to financing decarbonisation. In the high-growth, high emission markets of Southeast Asia, this is particularly true. Indonesia has set out an ambitious, enhanced Nationally Determined Contribution (NDC) – with 84% of the capital needing to come from private investors[1]. Similarly, the Philippines has committed public funding for just 2.7% of its ambitious NDC target through 2030[2]. In both these markets and elsewhere across ASEAN, this leaves significant funding gaps to be filled from private capital.
The opportunities to invest in the transition across ASEAN are significant. The question is often asked whether there is capital available. As with most markets, the answer is yes, if there are opportunities that can deliver adequate risk adjusted returns. It is then about how we can create robust pipelines to increase engagement from private capital and ultimately unlock investment.
Developing markets are perceived very differently by investors and policymakers but the GFI’s problem diagnosis, approach and solutions are actually the same as those we have deployed in Europe. When the GFI began our work, policymakers were focussed on financial regulation – in particular the role of disclosure regimes, taxonomies and carbon markets in unlocking capital for the transition. This was an important part of the approach but on its own, it wasn’t sufficient to unlock investment. Looking now at ASEAN markets we can see a similar emphasis. Indeed, there are multiple taxonomies in the market including for example, an ASEAN one, an Indonesia one and a Singapore Asia taxonomy. The GFI’s methodology is to focus on sectors. Real economy policy in key sectors, brings clarity to investors on what the ultimate demand is going to be and what incentives are available for corporates and consumers operating in them. This is as, if not more important than financial sector regulation, even where the latter is specific to sustainability.
That is why in the Philippines, we have worked in granular detail on transport and waste, looking at the specific barriers to investment. In the waste sector, limited incentives to drive demand for recycled materials are coupled with low tipping fees, which favour landfill where there is a lack of sorting infrastructure. A similar issue persists in transport where the ending of incentives is coupled with a lack of charging infrastructure. In designing solutions, the GFI’s output encompasses both financial structuring and specific impact-oriented policy as only this combination will ultimately unlock capital.
The other element is institutional design and frameworks. Ultimately this is about governance and creating the conditions for investors to better understand the finance and policy ecosystem, gain confidence in it as they engage more, and ultimately invest. In Indonesia, the GFI has been working on a new cross-government initiative with the Ministry of Finance called the Sustainable Finance Committee. It will work to align financial sector and real economy policy with development capital and pipeline, to create a more credible and transparent platform for investors to engage with, reducing friction costs and increasing investor understanding. This combined with deploying the GFI’s sector coalition model into Indonesia to focus on barriers and solutions pivotal to the NDC, should begin to close the execution gap and mobilise institutional capital at scale.
The barriers to invest in developing economies are often perceived as intractable but this is based on assumptions that everything is different. Sector policy combined with smart development capital will create risk/return opportunities to suit private capital. But because international capital is less familiar with these markets, we need to go further with creating transparency around institutions to increase engagement and confidence. The good news we have developed the playbook and can adapt it for these critical markets. If you would like to hear more about our work in Southeast Asia and elsewhere, please get in touch.
This article was originally published in the June edition of Green Finance Quarterly. Read the full publication here.
[1] MoF/GFI White Paper on the Sustainable Finance Committee (forthcoming)
[2] Climate Adaptation Platform: Funding Philippines’ Climate Resilience Plan (2023)
