The previous year has emphasised the necessity of coordinated worldwide action against climate change, particularly from governments, and in particular of increased urgency and commitment. Throughout Southeast Asia (SEA), this has also been true, where a consistent increase in commitments from all parties involved is positive. Seven ASEAN nations are currently thinking about implementing carbon pricing policies to encourage action, while four have increased their climate commitments. Busi – nesses have committed to setting science-based targets four times more frequently, and several executives have laid out ambitious multibillion-dollar investment plans to decarbonise their companies. However, the true measure of a strategy in climate action, as in business and life, is not the goals that are established, but rather the tangible actions that are taken to quicken the pace of change and achieve the desired results.

The green transition in SEA is at a tricky juncture where bold ambition is meeting the realities of the day. Before even considering ambitious plans to decarbonise and build the industries of tomorrow, governments in SEA are facing several challenges, including rising energy demand (which is expected to grow by nearly 42 per cent over the decade to 2030), a growing middle class, strong pressure not to raise energy and electricity prices, and the need to deliver just and equitable growth. Therefore, all parties involved must take strong action as a group to promote the system-level change needed to hasten and expand decarbonisation throughout SEA. Given the significant headroom for increased deployment of commercially ready and cost-effective technologies from low penetration levels today, the experts remain enthusiastic about the region as a destination for green investment. According to Bain and Company estimates, this may result in an additional $300 billion in annual revenues by 2030 and offer a significant chance to invest in businesses that have well-suited business models and technology and have the potential to emerge as the next market leaders in the green economy.

Key findings

Even while SEA only contributes around 7 per cent of world emissions, its emissions are rising continuously and are predicted to do so quickly in the absence of action to lower its emissions intensity. To decarbonise and transition, SEA will need to address several systemic issues.

Challenges

  • Need to balance growth and transition: GDP per capita in SEA region was recorded at low levels at $6,000 in 2023 compared to $63,000 in North America. Moreover, it is projected that the growing economies and middle class will need around 50 per cent more power demand in 2040 and about 60 per cent of coal power stations are young (coal plants under 20 years). A just transition is required to ensure access to clean and affordable energy for all stakeholders.
  • Legacy fossil fuel dependence: The economy is around 35 per cent dependent on energy-intensive sectors. Fossil fuels continue to provide affordable access to baseload power, with around 75 per cent of the power sector dependent on fossil fuels and grid constraints hinder the ability to leverage solar/wind.
  • Uneven opportunities and limited cooperation: There is a mismatch due to the geographical dispersion of renewable resource potential versus demand and a lack of cross-regional grid connections and cooperative mechanisms that require immediate attention.
  • Inadequate access to financing: Insufficient returns for investment with higher perceived risks (e.g., currency fluctuation) is a major challenge. Also, a majority of state-owned grid infrastructure limits private-sector participation.

Transition potential
As it makes the shift to a green economy SEA must take into account all stakeholders and provide access to affordable and reliable clean energy. It must also minimise job displacement and support reskilling and redeploying workers, ensure inclusive community decision-making and focus on nature and biodiversity co-benefits. SEA has a distinct chance to take advantage of the impending shift for economic growth and competitiveness, not merely decarbonisation. Some of the investable ideas for the future include green fuel sources, improved farming practices, greener transport, process optimisation, nature-based solutions and energy-efficient buildings.

Key recommendations

  • Focus attention on investable decarbonisation ideas: Invest in initiatives that have a track record of success and are deployable (large size, quick impact, and decarbonisation).
  • Scale up policies and incentives to enable corporate action: Policies such as carbon pricing, disclosure, green transition clusters, and regional cooperation should be expedited. Interoperable frameworks that facilitate cross-border financing and capital at the lowest possible cost should be actively promoted.
  • Promote innovation in finance to catalyse investment: Expand cutting-edge financing methods (such as project financing, carbon credits and blended finance) to make sure different investors have enough motivation and strong business justifications to make investments.
  • Advance country and regional plans for the transition path: Investors seek clarity regarding the upcoming wave of transition and the direction that industries will take; clarity supports investment ideas and emphasises the need to focus more on what can be done now in order to move action forward more quickly.

SEA’s impact on global climate action

When it comes to decarbonisation and global climate action, the SEA region has a critical role to play. It is the fourth largest energy consumer in the world. Moreover, it produces around 75 per cent of electricity from fossil fuels, including coal, natural gas, oil and other non-renewable sources. SEA has pledged to reduce emissions by around 32 per cent by 2030. Accelerated action is urgently needed to change the trajectory. It has renewed its commitments at COP28 and pushed for greater global support for transition.

Accelerators to unlock potential

There have been restrictions on the scale of capital flows into the green economy. ASEAN investment in renewables continues to underperform compared to global trends and therefore a change is needed to unlock the green potential in the power sector.

Some of the risks impacting the capital returns include:

  • Project investment risks
    • Higher costs of capital: The cost of capital for renewable energy investments remains relatively high in many SEA countries like 10-12 per cent in Vietnam, and the financial value proposition for private sector investment in renewables remains unclear compared to advanced economies.
    • Higher perceived risks lower project bankability: Private capital has accounted for only 60 per cent of renewable power investment in SEA, compared to about 90 per cent in advanced economies, due to ongoing perceived currency fluctuation and regulatory risks.
  • Emerging market risks
    • Higher offtake risk: In many SEA countries, electricity is heavily regulated, often subsidised to the consumers and requires a state-owned utility enterprise to be the sole off-taker; uncertainty about the ability and timing of grid upgrades to support.
    • Lack of policy continuity: Supportive policy incentives in SEA countries like Vietnam have spurred a significant solar and wind buildout, especially over the past 5 years, but the process has been characterised by constant changes to deployment and grid regulations, and uncertainty about tariff structure. Therefore, much more needs to be done to accelerate investments. The accelerators required to unlock full potential include policies and incentives to further push transition and green investments, innovative finance mechanisms to facilitate more capital flow, scaling corporate investment to establish future-ready businesses, cluster/pilot developments to scale technological development and regional collaboration to drive coordinated SEA strategy. These can help build ecosystems for the near term and bring investments to scale.

Conclusion

Although the SEA region has made progress, there is still a long way to go. Five out of 10 SEA countries have improved national roadmap at sector level linked to COP28. Moreover, around $6.3 billion green capital inflow was recorded in 2023 in the SEA region and 200 per cent increase in electric vehicle sales from 2019 to 2022. However, it still faces difficulties to reduce emissions and reach net zero targets. There is an almost $1.5 trillion investment gap with only $45 billion in investments made in 2023 and the projected energy demand is expected to increase by 40 per cent from 2020 to 2030. To meet the 2030 targets, action must be taken by all stakeholders.

Collective actions across stakeholders and countries so SEA can accelerate action. For instance:

  • Governments
    • Need to prioritise and focus on green incentives
    • Continue accelerating progress on carbon pricing and national carbon markets
    • Develop a policy framework that encourages regional collaboration
    • Adopt an integrated approach that considers transition and green investments in a just and inclusive way.
  • Corporates
    • Need to identify revenue growth opportunities and invest in proven ideas
    • Decarbonise and invest in green opportunities that increase long-term resiliency and future-proofing
    • Invest in resource and capability-building
    • Establish corporate-level roadmaps aligned with national plans/targets.
  • Investors
    • Need to identify opportunities to partner with corporates and the public sector on pipeline development and optimising risk/return
    • Invest in the talent pool and set up teams for green finance
    • Facilitate public-private knowledge sharing
    • Continue to pilot catalytic capital usage and the platform for novel financing.

This is an extract from a recent report titled “Southeast Asia’s Green Economy 2024: Moving the Needle” by Bain & Company