Green finance has been gaining traction across the financial value chain. It provides economic benefits, with a focus on environmental, social and governance factors. Recognising the need for green infrastructure, the Association of Southeast Asian Nations (ASEAN) member countries have been actively exploring green financing options. Multilateral agencies are increasingly financing green infrastructure projects and the green bond market is gaining popularity. Further, green sukuks are emerging as an alternative to green bonds in countries such as Malaysia and Indonesia. While most of the ASEAN member countries have laid the basic foundation for green financing, private sector investment in green energy and infrastructure seems to be lagging.
Since the signing of the Paris climate agreement in December 2015, investors have discovered huge opportunities in the green bond market. The first ASEAN country to enter the green bond market was the Philippines, with the launch of AP Renewables’ PhP 10.7 billion Climate Bonds certified green bond in 2016 to finance geothermal assets. With the launch of the ASEAN Green Bond Standards in November 2017, other ASEAN countries too started showing an encouraging response to green bonds. The issues, which primarily originated from Malaysia, the Philippines, Singapore and Thailand for funding renewable energy, energy efficiency, water and waste management and other sustainable projects, demonstrate the growing interest in sustainable finance throughout the region. In 2019, bonds worth more than $3.8 billion were issued under the ASEAN Green and Sustainability Bond Standards, six times more than the $639 million green bonds issued in 2018, which were over 50 per cent more than the bonds raised in 2017.
The emergence of sukuks can be traced back to 2014, when the Securities Commission of Malaysia launched the Sustainable and Responsible Investment Sukuk framework. Malaysia became the first country to issue a green sukuk in 2017 as part of its Green Technology Financing Scheme. Indonesia followed suit and, in February 2018, entered the Islamic bond market with a $1.25 billion (SGD 1.65 billion) green sukuk, the first sovereign sukuk issue in the world. These sukuk bonds were aligned with the ASEAN Green Bond Standards. A subsequent $750 million issue launched in February 2019 made Indonesia the largest issuer of green sukuks till date.
In April 2019, the Southeast Asian governments, the Asian Development Bank (ADB), and major development financiers launched the ASEAN Catalytic Green Finance Facility (ACGF) to spur green infrastructure investments worth over $1 billion across Southeast Asia. An initiative of the ASEAN Infrastructure Fund, the ACGF will provide loans and technical assistance for sovereign green infrastructure projects on sustainable transport, clean energy and resilient water systems to attract private capital by mitigating risks through innovative financing structures. As of February 2020, the ACGF’s seven co-financing partners, the ASEAN Infrastructure Fund, ADB, KfW, the European Investment Bank, AgenceFrançaise de Développement, the European Union and the Republic of Korea, have committed $1.42 billion in sovereign loans and $13.1 million to provide technical assistance. Another notable multilateral initiative, the International Hydropower Association launched a new sustainability fund in February 2020 to aid hydropower project developers and operators in Asia, Africa, Europe and the Americas to improve their social and environmental performance.
Recently, several initiatives were taken at the country level in Southeast Asia to promote green financing. One such initiative taken by the Singaporean government has been the creation of the Asia Sustainable Finance Initiative in January 2019. It is a multi-stakeholder forum that aims to leverage the potential of the financial sector to deliver on the United Nations sustainable development goals and the Paris climate agreement. The platform will bring together the finance industry, academia and scientific organisations to support Singapore-based financial institutions in deepening their sustainable finance expertise. Further, in October 2019, Singapore’s Infrastructure Asia signed a cooperation agreement with ADB to help governments in Southeast Asia adopt an innovative green finance approach, and develop bankable and sustainable infrastructure projects. The country has also launched a $2 billion green investments programme to invest in public market investment strategies with a strong green focus.
There has also been an increase in green infrastructure financing in the Philippines, Thailand and Vietnam. In January 2019, the Philippines’ Rizal Commercial Banking Corporation announced the establishment of its green finance framework for the issue of green bonds and loans, which can be denominated in pesos or any other currency. The green finance framework is the first in the country to be aligned with the ASEAN Green Bond Standards. The Philippines is also considering the possible expansion of the ASEAN Green Bonds Framework to include sectors such as transportation, infrastructure and commercial banking. Besides, the country is exploring opportunities to fund various public-private partnership projects through green financing. As part of Thailand’s policy initiatives, the Bank of Thailand (BOT) signed an MoU with the International Finance Corporation (IFC) in November 2019 to accelerate sustainable financing in the country. Under this collaboration, IFC will support BOT in developing a sustainable finance policy framework, including a sustainability roadmap to direct more capital towards sectors and projects with environmental and social benefits.
According to the Global Progress Report of the Sustainable Banking Network launched by IFC in October 2019, Vietnam is among the 38 emerging market economies that have initiated key green banking reforms. In 2018, the State Bank of Vietnam approved a green bank development action plan to realise the country’s sustainable development goals by 2030. More recently, the World Bank issued its first green loan worth $212.5 to a bank in Vietnam in order to reduce the carbon emission rates in the country.
The way forward
While the ASEAN may still be a relatively small player in the global green/sustainability debt market with about $330 billion raised in 2019, it seems that the initial seeds for the development of a green debt market have been sown. The ASEAN member countries have been increasingly focusing on switching to green energy and infrastructure. In 2018, Malaysia set the goal of increasing the share of renewable energy generation to 20 per cent by 2030 from the current 2 per cent. Besides, Vietnam is working on implementing several mega solar power projects later this year. However, there is still a long way to go in achieving these goals. The ASEAN member states need to recognise that private sector investment is imperative for building green infrastructure and appropriate steps need to be taken in this regard. The recent announcement by Singaporean government agency Infrastructure Asia and ADB to develop bankable green infrastructure projects across Southeast Asia is a positive move in this direction.
Southeast Asia has emerged as an attractive investment destination, with countries such as Vietnam, the Philippines and Singapore witnessing significant infrastructure growth. Hence, the green infrastructure investment requirement in this region will grow manyfold in the near future. This is expected to be met by foreign and domestic investment in green infrastructure projects through innovative funding sources.