Alexandra Tracy, Green Finance Advisor of Friends of the Earth (HK)
A new report by Bain & Company, Temasek and Microsoft is bullish on the opportunities for investing in South East Asia’s green economy. The report predicts that 2022 will be an “inflection point” for South East Asia as the region works to translate COP26 climate commitments into tangible action. Six governments have set net zero targets in the last year and two (Singapore and Indonesia) are piloting carbon taxes.
The “Southeast Asia’s Green Economy 2022 Report”, released during Temasek’s annual Ecosperity Week conference, identified five key areas of opportunity in the region over the next decade, representing as much as US$1 trillion annually.
Five key areas of opportunity
By 2030, the authors expect solar and wind could generate US$30 billion a year in revenues, building on accelerating corporate investment in both sectors. While market reforms and grid upgrades are still needed to allow renewables to reach their full potential, there are clear opportunities for solar, especially in Malaysia and the Philippines, and for both onshore and offshore wind projects in the Philippines and Vietnam.
Electric mobility looks poised to take off in Indonesia, Thailand and Vietnam, especially for two wheeler electric vehicle manufacturing and sales, building up to revenues of US$50 billion a year in 2030. Foreign companies currently dominate vehicle and cell manufacturing, but there are likely to be opportunities for local players become involved in setting up battery manufacturing plants in the region.
Meanwhile, urban development represents a US$40 billion opportunity annually by 2030, across many sectors. Green building in Singapore and Indonesia will be a driver of growth, while the explosion in the number of data centres in the region will continue to create demand for energy saving technology and efficient cooling solutions in countries such as Singapore, the Philippines and Thailand.
Forest conservation is one of the largest carbon abatement solutions for South East Asia, with the potential to generate US$20 billion a year in 2030. The authors expect opportunities for investment to grow significantly, especially in Malaysia and Indonesia, as trading carbon credits generated by nature based solutions becomes more widespread.
Closely linked to forest conservation as a carbon abatement solution, sustainable agriculture could represent a US$30 billion opportunity annually by 2030. Technology solutions to improve efficiency and reduce wastage, such as precision agriculture and real time data collection, are likely to see significant early stage investment, while online platforms to allow farmers to reach markets more easily are already gaining traction in countries such as Thailand and Vietnam.
Green investment growth
South East Asia has seen US$15 billion invested in green sectors since 2020, with the majority going to renewables and the built environment. Corporates have been building capacity across the region in renewables and electric vehicle ecosystems while there has been significant growth in private equity and venture capital investment, especially in the energy and agrifood sectors.
Short of where it needs to be
While the report is positive about the momentum in green investment growing across both public and private sectors, it clearly states that South East Asia is well short of where it needs to be to reach 2030 goals.
There is still a large emission gap of 2.6 to 3.2 gigatons to reach a target of maximum 1.5 degrees Celsius of warming by 2030, according to countries’ latest Nationally Determined Contributions and policy projections. The capital amount needed to close this gap could be as much as US$3 trillion, the bulk of which will be required to finance upgrades in energy, industrial and residential urban development and waste management.
Measured against these targets, the current investment level is less than US$20 billion. While private sector green financing is growing, it is insufficient and public sector needs to play a bigger role to fill financing gaps, particularly in terms of system costs, such as development of a renewables grid and full infrastructure for electric vehicles. Meanwhile, current concerns about energy security, food security and widespread inflationary pressures are competing with climate change for urgent attention from policy makers.
What needs to change
The report suggests that there are a number of actions that could accelerate the pace of green investment in the region.
There needs to be more emphasis on taking opportunities to roll out proven technology, as opposed to identifying “revolutionary” decarbonisation solutions. This could also help to tackle stubborn investment barriers such as uncertainty about returns and the small scale of many start up projects.
Governments need to do more to clarify system costs for energy transition, including the phasing out of legacy assets, and to put in place mechanisms to attract private investment. They can also do more to incentivise the financial services industry to develop new products that lower the cost of capital for companies seeking to decarbonise, especially small and medium sized enterprises.
Finally, steps could be taken to increase collaboration throughout South East Asia. Decarbonisation presents different challenges across the region, where demand might exist in one country, but capital in another, while opportunities need scale to be delivered at lower costs. Government and business must look for ways to foster partnerships across value chain, industries and public/private sectors to allow expertise and capital to flow most easily to where it is needed.