With Southeast Asia facing a funding deficit to meet its burgeoning energy and infrastructure needs, the region needs stronger coordination, skills and transparency in elevating sustainable projects to investors, according to the findings of a report by the Singapore Institute of International Affairs (SIIA). The report, titled “Financing Sustainable Infrastructure in ASEAN”, finds that underpinning Southeast Asia’s underutilisation of sustainable financing to meet its vast infrastructure needs is a lack of commonality in environmental and social standards and risks considered by financial institutions, project developers, multilateral institutions and governments.
Excerpts from the report…
It is increasingly clear that ASEAN economies cannot continue on their current growth trajectory without taking into consideration climate change and sustainable development. Green and sustainable financing can help address both economic and sustainability challenges. It promotes the efficient flow of capital towards activities and projects that are more sustainable and responsive to climate concerns. However, green and sustainable financing is currently lacking in ASEAN’s infrastructure sector. Governments fund the majority of infrastructure projects in Asia and some governments’ efforts to adopt green financing are in the early stages. In order to move the needle significantly, ASEAN governments need to signal, at the regional level, a stronger commitment to channel more green and sustainable financing to meet the massive infrastructure gaps. ASEAN governments can also do more to emphasise sustainability in how infrastructure projects are conceptualised and developed.
One contentious area is managing the energy mix. Coal has been singled out for its significant contribution to greenhouse gas emissions worldwide, while natural gas and renewables are expected to expand their share in the energy mix as part of the transition to a low-carbon economy. ASEAN’s energy demand is expected to rise by 50 per cent, and the region aims to source 23 per cent of its primary energy from renewables by 2025. Yet, the reliance on coal in many ASEAN countries will continue to be a sticking point – its share in ASEAN’s power generation mix stands at approximately 33.3 per cent, and countries such as Indonesia and Vietnam are rich in coal reserves.
ASEAN governments must also recognise that building physical infrastructure for transport comes with its share of environmental and social (E&S) risks which need to be managed. Traffic congestion persists in many ASEAN cities due to the lack of efficient public transport systems and the low cost of private vehicles, although Singapore is an exception. Despite the benefits offered by better transport networks, there are concerns that the construction activities involved are labour intensive, exposing the projects to higher labour and social risks such as workers’ health and safety. To better address these E&S risks, ASEAN governments can do more to emphasise sustainability in how infrastructure projects are conceptualised and developed.
The political risks and uncertainty that stem from frequent changes in political leadership in many ASEAN countries may hinder the delivery and completion of infrastructure projects. Therefore, multilateral institutions play a critical role in providing more stability through various avenues such as co-lending, working with host governments to build capacity, as well as raising the E&S bar in the region through their international sustainability standards, among others.
Financiers today place increasing emphasis on E&S issues alongside economic viability considerations due to the recognition that E&S risks can undermine the bankability of projects. Greater scrutiny from various stakeholders also translates into expectations for financial institutions to disclose the projects financed and their E&S sector policies.
European banks, pension funds, and multilateral development banks (MDBs) tend to have more stringent E&S standards. Apart from extending loans, MDBs also assist with capacity building, and provide guarantees among others. These help to enlarge the pool of available capital while possibly crowding in private sector investment. The MDBs also provide a framework for sustainable practices by ensuring that any project they finance adheres to their relevant standards.
Complying with more rigorous E&S standards – which are not mandated by national laws and regulations – continues to be perceived as increasing operational costs. This view is more prevalent among local subcontractors who are less visible to the financiers, face greater financial constraints, and have an incentive to save costs by compromising on their sustainability practices. To this end, they may turn to local financial institutions with less stringent sustainability standards and who exert less pressure on their clients to improve on their E&S practices.
Some ASEAN financial institutions have developed sector-specific policies to articulate their approach towards activities deemed to carry high ESG risks. For instance, all three Singapore banks – DBS Bank, OCBC Bank and United Overseas Bank – announced in 2019 that they will stop financing new coal-fired power plants, becoming the first in Southeast Asia to align with their Western counterparts on this topic.
In the face of significant infrastructure needs and opportunities in ASEAN, substantial barriers exist that hinder capital from flowing towards sustainable infrastructure. ASEAN governments, together with multilateral institutions and industry players, could train and equip workers with sustainability skills and knowledge in the renewable energy and sustainable transport sectors. The transition to renewables will hurt employees in fossil fuel-reliant industries. Besides imparting relevant skills, equipping workers with an understanding of ESG principles and how to address those upfront during project conceptualisation is crucial.
Considering the greater scrutiny from the public, the media, investors and shareholders, there is greater demand placed on financial institutions today to be accountable for their financing decisions. At the same time, ASEAN countries take time to transition to renewables and sustainable transport, and some of the sustainability challenges may be unique to the local context. By providing general guidelines on how they approach context-specific challenges in power and transport, these financial institutions can inform local project developers about their expectations while promoting constructive dialogues with other stakeholders. Independent auditors should also be involved in carrying out assessments after the project is completed, in order to identify new risks the local community may be exposed to, such as increased air and water pollution. Financial institutions should be prepared to work with their clients to mitigate these new risks. Besides, ratings agencies could develop a rating mechanism for the E&S impacts of power and transport projects.
While various financial institutions have either adopted international sustainability standards, frameworks and/or principles or developed their in-house policies and guidelines to better identify and mitigate E&S risks, the disparity in approaches suggests that these E&S risks are unlikely to be dealt with in a consistent manner. The current portfolios of financial institutions may be exposing them to more E&S risks than anticipated. Sustainability needs to be incorporated at the planning stage, but monitoring E&S impacts throughout a project’s life-cycle is equally important. Without taking the necessary steps to pursue sustainable infrastructure now, infrastructure development which benefits the present may come at the cost of future generations.