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How to Direct the Flow of Green Investments Into ASEAN

In November 2021, heads of state from nearly 200 countries struck a major deal to intensify climate action at the 2021 United Nations Climate Change Conference (COP26), including a call to wealthy nations to at least double their funding to protect poor nations from the hazards of global warming.

The ambitious target was set even as the wealthier nations failed to fulfill an earlier promise from 2009, when it agreed to provide $100 billion a year by 2020 to help poorer countries. It also amplified the long-drawn debate on who should pay for climate damages.

Activists and world leaders have argued that parts of the world that contribute the least to global warming, which includes developing countries and regions like Southeast Asia, stand to suffer the most as temperatures climb.

Yet, it is far more challenging for such nations to mitigate against climate change as they need to balance critical development goals with the higher costs of green infrastructure and technology, as well as manage the potential trade-offs of prioritizing either.

The Monetary Authority of Singapore (MAS) estimates that a $200 billion green investment is needed in ASEAN per year through 2030. But investments have so far fallen short. According to a 2017 United Nations Environment Programme report, annual flows of green finance in Southeast Asia were estimated at just $40 billion.

There is clearly a huge need for finance, but not enough is flowing in that direction. What is causing the significant financing gap, one that is growing more critical to bridge as the effects of climate change intensify across the world?

The issue is driven largely by a mismatch between needs and capital flows.

Countries could also consider ESG projects that have co-benefits — that are not just sustainable for the environment but also addresses other social issues, such as income and gender inequality.

Bringing ASEAN Projects Up to ‘Bankable’ Standards

There’s no shortage of net-zero-aligned capital within global finance. Private investors today are fueled by pressure from stakeholders, regulations, diversification needs and more.

The challenge lies in finding investment-ready or bankable projects in ASEAN countries. Investors claim that businesses are not coming up with project proposals that are fit to utilize global financing.

But a report by the World Economic Forum, in collaboration with Oliver Wyman, found that there are mechanisms that businesses can put in place to turn the tide on the situation, such as by identifying key performance drivers to better commercialize operations based on breakthrough technologies and reduce the costs of innovation. This involves pinning down the greatest innovation and investment risks, and subsequently coming up with new ways of doing business to improve underlying cash flows.

Businesses can also look to entities like the Green Climate Fund (GCF), which provides financial and technical assistance for the preparation of funding proposals through its Project Preparation Facility.

Private investors want to be assured of the capacity of businesses to plan and manage their projects successfully, and there is no better way to reflect this than through a strong and sharp proposal.

Stimulating Early-Stage Investments

While investors are keen to finance the latest technology that shows potential to have an impact on climate change, the lack of a proof of concept or profitability and an inexperienced team could make newer projects appear too risky. Yet, it is important that such projects get funding early to avoid the “valley of death” and keep the momentum of innovation going.

In such cases, entities like GCF can help by investing in early-stage equity to de-risk the project, and in turn catalyze much larger private sector financing.

There are already case studies, such as in Chile where the GCF made a $60 million anchor equity investment to an innovative energy system that combines solar energy and pumped storage hydroelectricity. The intention with the initial funding is to attract additional private sector debt and equity investors to fund the remaining investment of $1.1 billion.

Ultimately, the goal is to encourage technology transfer from developed to developing countries in a more expeditious manner, helping poorer nations adapt to climate change.

Balancing Developmental and Environmental Needs

Perhaps the toughest issue to resolve is how climate change is lower down the list of priorities for many developing countries. Other basic needs like public health, housing, shelter, food, safety and security take precedence over global warming.

There are, however, still ways for these countries to develop green initiatives for greater sustainability. For instance, skipping coal fire plants and jumping straight to renewable energy now as prices are low.

Countries could also consider ESG projects that have co-benefits — that are not just sustainable for the environment but also addresses other social issues, such as income and gender inequality. The GCF funds such projects.

Another critical issue is for policymakers to encourage the flow of green finance, not just to climate solutions like renewable energy but also technologies that will solve industrial decarbonization in hard-to-abate sectors. One way to achieve this is to offer predictable, adequate, and long-dated incentives and de-risking measures that could improve the risk-return profile of breakthrough decarbonization projects.

Governments could also steer stakeholders toward sustainable goals by engaging in dialogue with financiers to set expectations, communicate national priorities and give credibility to low-carbon pathways.

But localized, fragmented regulatory activities and public-sector schemes will likely result in limited effectiveness. A coordinated global response across sectors and technologies is required to create a level playing field and ensure that green solutions can compete in the marketplace.

The challenge of helping poorer nations adapt to the effects of climate change is significant but not impossible to overcome. The key lies in channeling funds to where they are needed most. This can be achieved through a combination of innovative financing structures, and policy and cooperation across the stakeholder ecosystem.

Peter Reynolds

Partner and Head of Greater China at Oliver Wyman

Peter Reynolds is a partner and head of Greater China based in Hong Kong. He also leads our sustainability platform for the Asia-Pacific region. He has worked at Oliver Wyman for 15 years, previously being based out of our London and New York offices.

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