Southeast Asia will track developments in the global economy and is forecast to grow by 4.4 per cent in 2021 and 5.1 per cent in 2022. Vaccination programmes and expansionary monetary and fiscal policies are expected to underpin the revival of domestic demand. Both factors are becoming evident in Malaysia and Singapore, two closely intertwined economies that are benefiting from accommodative financial policies, and in Indonesia. In the Philippines, fiscal stimulus from spending on infrastructure and social assistance will promote a bounce back. Brunei Darussalam and Viet Nam, which did not go into recession in 2020, will see their economies expand further in the coming years. In contrast to a generally positive subregional economic outlook, Myanmar’s output is forecast to shrink by 9.8 per cent in 2021 as continued disruptions of government operations and mass political protests worsen the problems of an economy that has been hard hit by the COVID-19 pandemic. With higher growth and rising international commodity prices, inflation in the subregion is projected to double from 1.2 per cent in 2020 to 2.4 per cent in 2021 and 2022. After falling in 2020, prices in Malaysia, Singapore, and Thailand will edge higher in the next 2 years. Inflation will be notably higher in Myanmar, the Philippines, Timor-Leste, and Viet Nam in 2021, but it will decline in Brunei Darussalam on easing supply constraints and price subsidies. Increased food production will reduce price pressures this year in the Lao People’s Democratic Republic.

Asian Development Bank (ADB) has recently released the report on Asian Development Outlook 2021: Financing a green and inclusive recovery. Excerpts…

 Mobilizing resources for a green and inclusive recovery

Asia’s phenomenal development over several decades often adopted a “grow first, worry about cleanup and equality later” approach. Well before the outbreak of COVID-19, sustainable development that protected the environment and benefited the broader population was already becoming a priority for many Asian governments. The pandemic has since caused regional gross domestic product (GDP) to contract for the first time in more than 6 decades and had a disproportionate impact on the health and livelihoods of poor Asians. It clearly demonstrated that abnormal risks can and do become reality, driving home the need to prepare for future risks, the most dire of which is worsening climate change. COVID-19 disruption to development has underscored the importance of pursuing green and inclusive recovery that will strengthen resilience under future shocks. In short, the COVID-19 pandemic gave society additional impetus to build back better. Building back better for environmentally and socially sustainable recovery is, however, a costly endeavor.

Financing sustainable recovery is therefore an important challenge facing Asia in the wake of COVID-19. It is the central theme of this chapter. How can the region secure the vast resources required for green investments such as clean energy and for social investments such as strong public health infrastructure? Resource requirements are often beyond the means of the public sector alone. Promisingly, green and social finance from private sources has grown rapidly in recent years, including in Asia. Global growth in private green and social finance is increasingly driven by financial considerations, which suggests that it can be sustained. While it was investors’ environmental and social goals that initially drove this growth, financial motives are coming to the fore, as this report shows. After Australia’s ratification of the Kyoto Protocol imposed restrictions on emissions in that country, for instance, the debt costs of high-emitting companies there increased by an average of 5.4 per cent, and their equity costs by 2.5 per cent, relative to low-emitting firms. This report also shows that firms that tap green finance tend to deliver superior returns and exhibit resilience during a crisis, thanks to greater patience in their investor base. Further, green and social finance creates positive recognition among investors, thus broadening the financing base.

New evidence confirms the positive environmental and social impact of sustainable finance. Asian firms that issue green bonds improve their environmental performance by 17 per cent within 1 year and by 30 per cent within 2 years on average, as measured by corporate environmental ratings. At the market level, green bonds are associated with reduced carbon dioxide (CO2 ) emissions attained through rising awareness of the United Nations Sustainable Development Goals (SDGs) and increased commitment to achieving them. Social impacts are more varied, but innovative financing instruments such as impact bonds show potential. This theme chapter first explains why sustainable recovery after COVID-19 requires catalyzing private capital and defines the basic concepts of sustainable finance. It then explores the key drivers of private green and social finance. It goes on to examine the actual impact green and social finance has on sustainable outcomes. A section explores complementary financing modes— public sector financing, microfinance, and carbon pricing—for cleaner and more inclusive recovery. As engaged public policy is central to nurturing green and social finance, the chapter closes with a wide range of policy options available to Asian policy makers.

Broad capital mobilization vital to sustainable development

While there is a strong and growing consensus favoring the SDGs, achieving them comes at a huge cost. The investment cost to developing countries globally to meet the SDGs has been estimated at $3.3 trillion–$4.5 trillion annually from 2015 to 2030 (UNCTAD 2014). As current annual investment is about $1.4 trillion, the annual financing gap is $2.5 trillion. The top three areas with the largest financing requirements are electric power infrastructure at $950 billion annually, climate change mitigation at $850 billion, and transportation infrastructure at $770 billion (Doumbia and Lauridsen 2019). Asia and the Pacific require annual investment estimated at $1.5 trillion from 2016 to achieve the SDGs by 2030 (UNESCAP 2019). This equals about 4 per cent of regional GDP. Within the estimate, the SDGs are classified into five broad areas (Figure 2.1.1). The largest area is clean energy and climate action, which requires $434 billion per year. The region also needs to invest $373 billion annually to end poverty and hunger, $296 billion to improve health and education, $196 billion to expand public infrastructure, and $156 billion to safeguard biodiversity. The vast amount of investment needed to meet the SDGs is beyond the means of the public sector alone. In fact, public and private sources alike make substantial investments that promote environmental and social sustainability.

Private finance provided 56.3 per cent of average annual climate investment in 2017 and 2018, according to the Climate Policy Initiative (2019). The same report noted that scarce public resources must be used to maximize synergies between public and private investors and align financing from both sources with the SDGs. Further, mobilizing resources from a broader private sector base fosters risk sharing on green and social projects across the public and private sectors.

The COVID-19 squeeze on fiscal space in developing Asia makes it even more imperative to mobilize private capital for green and social investment. The economic downturn caused by the pandemic has undercut tax revenue collection in developing Asia (Nagata 2021). Tax relief is an integral part of fiscal stimulus packages launched by Asian governments to support growth in the face of the downturn, but it further reduces tax revenue. In addition, increased government spending to tackle the health and social impacts of the pandemic on top of the economic impact leaves even fewer fiscal resources available for meeting the SDGs. Increased government debt in recent years is another reason to mobilize private capital to build back better and achieve the SDGs.

To sum up, private capital is vital to close the funding gap for building back better toward a sustainable Asia. Even before the advent of COVID-19, the sheer amount of funding required for the SDGs inevitably meant a large role for private financing. The tightening of fiscal space under the COVID-19 pandemic squeezes available resources and thus further strengthens the case for catalyzing capital from private sources to help finance green and inclusive recovery from COVID-19.

What is green and social finance?

Financial markets have long recognized the importance of corporate social responsibility (Carroll 2008). Only relatively recently, though, do they aim to achieve specific social and environmental impacts on top of generating a financial return. Because of its short history, green and social finance is institutionally underdeveloped and lacks in a consistent definition, terminology, or set of agreed reporting and disclosure standards, let alone common metrics for measuring impact. A review of similarities and differences in the definitions and taxonomies of sustainable finance currently in use across five major markets suggests that a proper definition and taxonomy would deliver benefits by enhancing market clarity, building investor confidence, and facilitating measurement and tracking (OECD 2020).

Despite different definitions, some consistency of terminology has coalesced around the construct “sustainable finance.” According to the European Commission, sustainable finance generally refers to “the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects.” Highlighting these three objectives, sustainable finance is often described as using an ESG lens to help investors make investment decisions and assess asset performance according to both financial and sustainable criteria.

The market for sustainable finance can be divided into two subcategories. Negative sustainable finance aims to “do no harm” by screening out investments that fall short on the three ESG dimensions, thus avoiding investments in, for example, gambling, tobacco, or alcohol. Positive sustainable finance seeks out investments identified as having potential for significant positive social or environmental impact, typically aligned with the SDGs, such as green bonds and sustainability bonds.

The three ESG themes commonly identified in practice are environmental for green finance, social for impact finance, and governance for stakeholder finance. Each ESG theme can adopt either a positive approach to align or integrate investments with the SDGs or a negative approach to exclude or minimize investments that violate ESG criteria. A taxonomy of sustainable finance can therefore be organized in terms of the three ESG themes broken down into negative or positive investment strategies (Figure 2.1.2).

From an ESG perspective, positive green finance typically focuses on innovation and new technologies that address environmental issues such as the climate crisis and pollution. These investments typically align with climate change mitigation and adaption, the environmentally sustainable management of natural resources, biodiversity conservation, renewable energy, energy efficiency, clean transportation, and pollution prevention and control (ICMA 2019). Negative green finance typically avoids investments that fail to be carbon neutral.

Positive social finance requires the deployment of capital for deliberate, additional social impact. As such, impact investment has emerged as a new model of positive social finance, in that it helps deploy capital to address social issues directly. Negative social finance disinvests in corporate behavior deemed to violate the corporate social responsibility framework, thereby disassociating the investor from business activities that generate undesirable social consequences.

Governance finance is concerned with the effects of investment in a firm on a range of key stakeholders around it. The most distinctive features of positive stakeholder finance consider a firm’s organizational ownership and forms of legal incorporation. The ultimate aim is to improve the quality of corporate governance.

While governance is one of the three components of sustainable finance, this study focuses on the other two, green finance and social finance, because the chapter’s primary interest is to explore how developing Asia can finance environmentally and socially sustainable recovery from COVID-19. Green and social finance is capital deployed in a range of investments designed to achieve specific and measurable environmental or social objectives.

Focusing on green finance, the Asian Development Bank (ADB) defines it, for the purposes of an innovative facility for the Association of Southeast Asian Nations called the ASEAN Catalytic Green Finance Facility, as all financing instruments, investments, and mechanisms that contribute to a “climate plus” approach, promoting both climate and environmental sustainability goals. One can examine the distinct components of green finance—and parallel components of social finance for socially sustainable goals—and analyze them separately.

A distinctive feature of green and social finance is the variety of types of capital available to be deployed and co-invested for environmental and social impact. The spectrum of green and social finance includes all types of capital that are deployed for sustainable impact, such as blended or catalytic finance, debt, equity, funds, and grants. While negative green and social finance typically utilizes equity and debt instruments that aim for a market return, positive green and social finance has access to a wider range of instruments: grants, foundation assets deployed as program- or mission-related investment, blended or catalytic finance, impact investment for either submarket and market return, development finance, and green and social bonds. Green, social, and sustainability bonds are noteworthy as positive green and social finance instruments that offer a market return, thus attracting investors from capital markets worldwide. Positive ESG finance has been on the rise since 2015 (Broadridge 2020). The diversity of finance models in the green and social finance spectrum offers opportunity for the further development of innovative financial instruments for more impact toward sustainability.

Capital markets now play a growing role in green and social finance. Bond markets in particular are emerging as major sources of financing for green and social projects. Green, social, and sustainability bonds are fixed-income debt instruments whose proceeds are used for eligible projects with positive environmental and/or social outcomes.

Recent developments in green and social finance in Asia

Asia also leads in markets for green sukuks, or Islamic bonds, which use their proceeds to fund environmentally friendly projects while observing Sharia restrictions. Following the first green sukuk issued by Malaysia in June 2017, annual issuance of green sukuks increased fivefold to reach $4 billion in 2019 (Figure 2.1.5). Globally in 2019, green sukuk issuance accounted for 2.4 per cent of all sukuks issued that year and 1.7 per cent of all green bonds. From 2017 to September 2020, $10 billion worth of green sukuks had been issued by 11 entities in four countries: Indonesia with 54 per cent of the total, Saudi Arabia with 13 per cent, the United Arab Emirates 12 per cent, and Malaysia 10 per cent. Indonesia attained its lead position with active government issuance. Malaysia has the largest number of private issuers, which are supported by tax incentives and subsidies for green bonds (Azhgaliyeva 2021).

Financial authorities in many Asian economies have made significant progress toward aligning their financial systems with sustainable development goals (Volz 2018): Bangladesh; the PRC; Hong Kong, China; India; Indonesia; Japan; Mongolia; Singapore; and Viet Nam. Other Asian economies are working on it but less far along: Cambodia, the Lao People’s Democratic Republic, Nepal, Pakistan, the Philippines, Sri Lanka, and Thailand.

The original report can be accessed here