Green finance has been gaining traction across the financial value chain due to its economic benefits with environmental, social and governance considerations. Recognising the need for green infrastructure, ASEAN member countries have been actively exploring green financing options. Multilateral agencies are increasingly financing green infrastructure projects and the green bond market is gaining popularity. Green sukuks are also emerging as an alternative to green bonds in some countries such as Malaysia and Indonesia. Although the basic foundation for green financing has been laid by most of the ASEAN member countries, private sector investment in green energy and infrastructure seems to be lagging behind.
Since the signing of the Paris Climate Agreement in December 2015, investors have been finding huge opportunities in the green bond market. The first ASEAN country to enter the green bond market was the Philippines with the launch of AP Renewables’ PhP 10.7 billion Climate Bonds Certified green bond in 2016 to finance geothermal assets. With the launch of the ASEAN Green Bond Standards in November 2017, other ASEAN countries too started showing an encouraging response in this dimension. The issues, which primarily originated from Malaysia, the Philippines, Singapore and Thailand to fund renewable energy, energy efficiency, water and waste management, and other sustainable projects, demonstrate the growing interest in sustainable finance throughout the region.
There were bond issues worth more than $3.8 billion under the ASEAN Green and Sustainability Bond Standards in 2019. This was six times more than the $639 million green bonds issued in 2018, which itself was over 50 per cent more than that raised in 2017.
The emergence of the sukuk can be traced back to 2014, when the Securities Commission of Malaysia launched the Sustai-nable and Responsible Investment Sukuk framework to facilitate the financing of sustainable and responsible investment initiatives. Following this, Malaysia became the first country to issue a green sukuk in 2017 as part of the Malaysia Green Finance Programme. Following suit, Indonesia, in February 2018, hit the Islamic bond market with a $1.25 billion (SGD 1.65 billion) green sukuk, the first sovereign sukuk issue in the world. These sukuk bonds were aligned with the ASEAN Green Bond Standards. A subsequent $750 million issue in February 2019 makes Indonesia the largest issuer of green sukuks till date.
In April 2019, Southeast Asian governments, the Asian Development Bank (ADB), and major development financiers launched the ASEAN Catalytic Green Finance Facility (ACGF) to spur over $1 billion in green infrastructure investments across Southeast Asia. An initiative of the ASEAN Infrastructure Fund, the ACGF will provide loans and technical assistance for sovereign green infrastructure projects on sustainable transport, clean energy, and resilient water systems, to attract private capital by mitigating risks through innovative financing structures. As of February 2020, the ACGF’s seven co-financing partners, including the ASEAN Infrastructure Fund, ADB, KfW, the European Investment Bank, Agence Française de Développement (AFD), the European Union and the Republic of Korea, have committed $1.42 billion for sovereign loans and $13.1 million for technical assistance. Another notable multilateral initiative, the International Hydropower Association (IHA) launched a new sustainability fund in February 2020 to aid hydropower project developers and operators in Asia, Africa, Europe and the Americas to raise their social and environmental performance.
Besides, numerous initiatives have recently been taken at the country level in Southeast Asia to provide a boost to green financing. One such initiative by the Singaporean government has been the creation of the Asia Sustainable Finance Initiative in January 2019, a multi-stakeholder forum that aims to utilise the power of the financial sector to deliver on the United Nations sustainable development goals and the Paris Climate Agreement. The platform will bring together the finance industry, academia, and science-based organisations to support Singapore-based financial institutions in deepening their sustainable finance expertise. Further, in October 2019, Singapore’s Infrastructure Asia signed a cooperation agreement with ADB to help governments in Southeast Asia adopt innovative and green finance approaches to develop bankable and sustainable infrastructure projects in the region. The country has also established a $2 billion green investments programme to invest in public market investment strategies with a strong green focus.
There has also been an increase in green infrastructure financing in the Philippines, Thailand and Vietnam. In January 2019, Philippines’ Rizal Commercial Banking Corporation announced the establishment of its green finance framework to provide the basis for the issue of green bonds and loans, which can be denominated in pesos or any other currency. The green finance framework is the first in the Philippines to be aligned with the ASEAN Green Bond Standards. The Philippines is also considering the possible expansion of the coverage of the ASEAN Green Bonds Framework to include sectors such as transportation, infrastructure and commercial banking. Besides, the country is exploring opportunities to fund various public-private partnership projects through green financing. As part of Thailand’s policy initiatives towards green finance, the Bank of Thailand (BOT) signed a memorandum of understanding with the International Finance Corporation (IFC) in November 2019 to accelerate sustainable financing in the country. Under this collaboration, the IFC will support BOT in developing a sustainable finance policy framework, including a sustainability roadmap to direct more capital to sectors and projects with environmental and social benefits. According to the Global Progress Report of the Sustainable Banking Network launched by the IFC in October 2019, Vietnam is considered among 38 emerging market economies to have initiated key green banking reforms. The State Bank of Vietnam, in 2018, approved a green bank development action plan to realise Vietnam’s sustainable development goals by 2030. More recently, the World Bank issued its first green loan worth $212.5 to a bank in Vietnam to reduce carbon emission rates in the country.
The Way forward
While ASEAN may still be a relatively small player in the global green/sustainability debt market with about $330 billion raised in 2019,i t seems that the initial seeds for the development of a green debt market have been sown. ASEAN member countries have been increasingly focusing on switching to green energy and infrastructure. In 2018, Malaysia set the goal of increasing the share of its electricity generated from renewable sources to 20 per cent by 2030 from the current 2 per cent. Besides, Vietnam is working to implement several mega solar power plant projects later this year. However, there is still a long way to go in achieving such goals. ASEAN member states need to recognise that private sector investment is imperative for building green infrastructure and appropriate steps need to be taken in this regard. The recent announcement by a Singaporean government agency, Infrastructure Asia, and ADB to develop bankable green infrastructure projects across Southeast Asia is a positive move in this direction.
Due to the emergence of Southeast Asia as an attractive investment destination and the infrastructure boom in countries like Vietnam, the Philippines and Singapore, many global investors are moving towards Southeast Asia. The dominance of China and Japan in the region bodes well as they use advanced technology and construction techniques for infrastructure development. Hence, green infrastructure investment requirements will be significant in this region in the near future. The growing need for green finance is expected to be met from an increase in foreign as well as domestic investment in green infrastructure projects through innovative funding sources.