As Southeast Asia (SEA) navigates a path of rapid urbanisation and economic progress, a pivotal challenge looms – developing infrastructure that fuels growth while safeguarding the environment and fostering long-term resilience. The region finds itself at a crossroads, where embracing sustainable infrastructure is no longer a choice but a necessity, driven by the rising threat of climate change, resource scarcity, and a global shift towards environmental, social and governance (ESG) investing.
Need for alternative funding mechanisms
Conventional funding avenues for infrastructure advancement in the SEA region may not be adequate to build green infrastructure and accomplish ambitious sustainable development goals. To mobilise private capital and address the marginally bankable or currently unbankable projects, need to achieve net zero transition, SEA nations must embrace innovative financing methodologies. Two crucial offerings gaining momentum are blended finance and transition credit. Besides, green, social and climate bonds are attracting private capital alongside public funds, enabling large-scale sustainable infrastructure projects. According to the International Monetary Fund (IMF), emerging and developing nations will require investments of at least $1.1 trillion annually for climate adaptation and mitigation. In response, the ASEAN Catalytic Green Finance Facility (ACGF), an innovative financing facility housed under the ASEAN Infrastructure Fund (AIF), has emerged as a collaborative effort between the Asian Development Bank (ADB) and ASEAN nations.
ACGF: A catalyst for change
The ACGF serves as a catalyst, providing financial and technical assistance to unlock private sector investment in green infrastructure projects. To incentivise green infrastructure investments, the ACGF offers attractive lending terms, including low lending rates for the initial years of the project cycle, partially offsetting the high upfront capital costs often associated with such initiatives. Some of the green infrastructure sectors to which the ACGF extends lending include renewable energy, energy efficiency, sustainable transport, eco-friendly cities, and sustainable water supply and sanitation. In its first four years of operation, the fund has successfully supported 39 projects and concepts at different stages of development. Together, the projects are estimated to result in the reduction of 408,434 tonnes of carbon dioxide equivalent (tCO2e) per year and have the potential to catalyse $72 million for capital expenditure and $150 million per year for operations and maintenance expenditure from private, institutional and commercial funds. Most recently, the fund provided around $10 million of the total $250 million funding to Indonesia to improve flood management capacity.
Other regional initiatives
The ACGF initiative aligns with the overarching ASEAN+3 Asian Bond Markets Initiative (ABMI), which aims to foster an environment conducive to sustainable finance in the SEA region. Through the development of supportive regulatory frameworks, infrastructure enhancements, and the stimulation of investor interest, the ABMI seeks to streamline the issuance and trading of green, social and sustainability (GSS+) bonds. In 2023 alone, PT Sarana Multigriya Finansial (INO) raised around $32.4 million and $13 million via Indonesia’s first social bond and sukuk. The WHA Corporation in Thailand raised around $30 million via its first sustainability-linked bond. Additionally, the ASA Philippines Foundation (PHI) raised around $90 million raised via its first social bond. The success of initiatives like the GSS+ Bonds Initiative by the ACGF demonstrates the feasibility and scalability of sustainable finance solutions in the region. Between 2020 and 2023, over $2.1 billion was raised under this initiative.
Progressive strides
Recent years have underscored the massive investments required to develop clean energy infrastructure in developing economies. The International Renewable Energy Agency estimates that the bloc’s member states will require an average annual investment of $210 billion up to 2050 to meet their climate goals. Despite the SEA region grappling with a reality gap between its net zero aspirations, it has made progress in its energy and green transition initiatives. Under the ACGF initiative, the ASEAN Infrastructure Fund and the Green Climate Fund are co-financing the Davao Public Transport Modernisation Project in the Philippines by extending $10 and $50 million in loans.
A $50 million policy-based loan package and around $23 million in project investments have been approved to support the Cambodian Energy Transition Sector Development Programme. This includes a $10 million loan from the ACGF. Additionally, the Export-Import Bank of Thailand (EXIM Thailand) issued a THB 5 billion ($135 million) green bond with three- and four-year maturities under the initiative. With energy consumption in the region expected to surge by 40 per cent this decade, climate-warming carbon dioxide emissions continue to rise, as the region remains reliant on fossil fuels. Green investments grew by only 20 per cent in 2023, attributed to increased investments in renewables and green data centres.
Key regional collaborations
Recognising the urgent need for climate action, several SEA countries have recently announced a series of climate partnerships with international organisations and investors. These collaborations aim to accelerate the integration of renewable energy, shut down coal-fired power plants, develop worker training programmes and promote equitable climate solutions. For instance, during COP28, Indonesia’s state-owned electricity company PLN signed 14 strategic agreements to accelerate the integration of renewable energy into the country’s power grid, shut down coal-fired power plants, and develop worker training programmes. Vietnam, acutely aware of its vulnerability to climate change, has taken steps to promote equitable climate solutions by approving its new power development plan (PDP8), which aims to boost wind and gas capacity and reduce reliance on coal. While SEA governments have endorsed numerous clean energy initiatives on their own, a coordinated approach is the key to ensuring a just energy transition that stimulates economic growth.
Forging the future
Rallying capital markets to support a climate-responsive and inclusive SEA demands a united front from all involved parties. By kick-starting sustainable bond issues, fostering supportive ecosystems and tapping into specialised expertise, the region is poised to tackle its urgent infrastructure requirements while making significant strides towards sustainability. Through a collaborative approach and the implementation of innovative financing strategies, the SEA region has the opportunity to forge a future that is both resilient and prosperous for each country in the region. By embracing sustainable infrastructure, the region can pave the way for greener growth paths, harmonising economic progress and ensuring a legacy of sustainable development for future generations.