In Southeast Asia, the emphasis on environmental, social and governance (ESG) practices has increased as the region becomes more conscious of the imminent hazards of climate change. In order to improve ESG performance and promote sustainable finance, ASEAN countries have taken significant steps in building sustainability rules, impact assessment frameworks, green taxonomies, sustainable financing models, and increasing overall governance standards in recent years. This includes the establishment of ASEAN’s Green Taxonomy, Singapore Exchange’s (SGX) implementation of ESG-focused listing standards, and the incorporation of ESG investing strategies by sovereign funds in countries such as Malaysia and Thailand.
Southeast Asia is at risk from climate change related phenomena, including rising sea levels and more frequent and severe weather events. With a dense network of terrestrial, freshwater and mangrove habitats – the original carbon capture and storage systems – the region is an excellent place to invest in nature-based solutions. The vast majority of people in Indonesia, Malaysia and the Philippines, the three most biodiverse countries in Southeast Asia, embrace the proposed worldwide target of saving 30 per cent of the world’s biodiversity by 2030. As of March 2022, 84 per cent of Malaysians, 94 per cent of Indonesians, and 85 per cent of Filipinos want their respective governments to take action towards attaining “30×30”.
ESG appetite Green and sustainable finance in Southeast Asia is still in its infancy, but the sector is expanding at a record rate, driven by issuers eager to diversify their funding sources to demonstrate their commitment to ESG and sustainability. On the investor side, according to an ASEAN investment report, 63 per cent of ASEAN investors are interested in investing in sustainable infrastructure projects, with 20 per cent currently doing so.
Among the numerous investment opportunities available to ASEAN investors in the infrastructure sector, the five sectors that appeal the most in terms of attracting investment are water and wastewater, solar power, wind power, electric vehicles and transport, and tidal and hydroelectric power. Water and wastewater infrastructure investment is undoubtedly of greater interest to ASEAN investors. The possible explanations for this may include the region’s strong economic development rates and growing industrialisation, as well as rapid population increase, urbanisation, and the assumption that climate change would exacerbate hydro-meteorological disasters such as floods and cyclones.
All of this places a significant strain on water and wastewater infrastructure throughout Southeast Asia, which will require substantial investment in the future. Importantly, sustainable finance and investment will play an ever-increasing role in addressing this requirement. ASEAN firms and investors are increasingly recognising and embracing the opportunity to access and invest in sustainable finance. Evidently, they are conscious of the greater global need and are working to place environmental and social concerns at the centre of their corporate and investment strategy.
Industry initiatives
Gunung Capital, a private investment management firm specialising in impact investments guided by ESG frameworks, will invest $500 million in ESG assets, including a portion designated for decarbonisation projects for the steel business of its Indonesian portfolio company, Gunung Raja Paksi (GRP). In the next five to seven years, most of the investment firm’s capital is expected to be devoted to three primary sectors: renewable energy infrastructure, industrial transition, and carbon mitigation. Gunung Capital will also monitor deployments in climate technology, food and agriculture, building infrastructure, and the internet of things (IoT). In May 2022, a blockchain-based platform named ESGpedia was established in an effort to make organisations’ sustainability data more accessible to financial institutions via a centralised registry containing verified global sources.
ESGpedia supports Greenprint ESG Registry, one of the four digital utility platforms under Project Greenprint that is being developed by the Monetary Authority of Singapore (MAS). In recent years, Thailand has seen an increase in the use of sustainable bonds to fund public infrastructure projects. Green, social and sustainability-linked bonds have grown at an exponential rate, reaching THB 262 billion in October 2021. In addition, efforts have been made to foster an enabling environment, with the creation of an ESG bond information portal. Mekong Safeguards is a five-year, $10.6 million project implemented by The Asia Foundation (TAF) to strengthen environmental and social standards and practices in the Mekong subregion of Southeast Asia in collaboration with major banks, governments, and developers on large energy and transportation infrastructure investments. As of June 2022, TAF’s Thailand Office is seeking a qualified and reputable firm to support Mekong Safeguards in its mission to accelerate the sustainable infrastructure transition in the Mekong subregion.
Challenges and risks
Due to the realisation that environmental and social (E&S) risks can weaken project bankability, financiers are placing increased emphasis on E&S issues alongside economic viability considerations. Financial institutions are expected to report the projects they have supported as well as their E&S sector policies as a result of heightened scrutiny from a variety of stakeholders. Within the transportation and energy industries, six identified areas of interest are solar, wind, geothermal, roads, railways, and seaports. However, when the interests are examined against the identified E&S hazards, their risk exposure and severity differ.
As the biggest infrastructure requirements for power and transportation in Southeast Asia are in rural regions, some of which are in close proximity to virgin forests or vast bodies of water, their influence on biodiversity, particularly on endangered species, is significant. Depending on the scope and nature of the project, renewable energy initiatives typically have a substantial impact on biodiversity. Among the social aspects of infrastructure development, land acquisition is the most challenging. In developing ASEAN countries, landownership is not well documented and property rights and regulatory permissions are difficult to get. Developing nations also struggle to acquire land for infrastructure development while balancing the interests of landholders.
Transportation projects, notably roads and railways, are more prone to land acquisition hazards than energy projects, as they may cut through numerous established towns that must be resettled if the programme advances. Furthermore, worker safety is a major problem in developing ASEAN countries. For instance, accidents on building sites are common in Cambodia, due to its inadequate safety regulations and weak labour rights. Frequently, building owners disregard safety procedures and cut corners, resulting in accidents. A failure to solve systemic sustainability concerns will affect the growth and profits of individual companies and economies as a whole, with ramifications for the financial institutions that support non-sustainable initiatives. Therefore, there is a compelling argument for financial institutions and financial regulators to consider ESG concerns.