The finance sector’s strong appetite for green projects will help fill the gap between infrastructure demand and deficiency of investments in Asia, but only if projects are designed to be sustainable and economically viable.
Financial networks will play a critical role in promoting green growth and sustainable development. These networks are increasing their influence on the direction of future energy development in Asia. This is happening for several reasons.
Increased awareness among financial players
Capital flows are increasingly seeking green and sustainable projects. Beyond global market sentiment or reputational management, finance resources including debt capital markets, equity capital markets and pension funds recognize that environmental, social and governance (ESG) factors – or harmony with sustainability – are becoming more important to how businesses are run long-term. This growing consensus, coupled with external pressures from shareholders, has spurred new initiatives and guidelines: Global Reporting Initiative (GRI) Standards; the International Integrated Reporting Framework; the Sustainability Accounting Standards Board (SASB); and the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations Report. Most initiatives have been advanced by non-governmental organizations. The UN partnership programme, the Sustainable Stock Exchanges initiative, is working with stock exchanges to improve disclosure standards related to sustainability. These developments aim to pressure private companies into incorporating sustainability into their investment decision-making. Even though such standards are at an early development stage and not yet converged into a single consensus, investors’ increased attention to ESG reporting is enough for private companies to participate in these initiatives and to take ESG factors more seriously.
Debt capital markets are also promoting green bonds so that investors can be sure that capital will be directly used for green projects. The green bond market has developed rapidly across the world. The total amount of green bonds was recorded at $258.9 billion in 2019, a 51 per cent increase from $171.2 billion in 2018, according to the Climate Bond Initiative. Private sector-led initiatives such as the Climate Bond Initiative and the International Capital Market Association have developed principles and guidelines for green bonds. Asia has developed climate bond markets according to regional guidelines such as the ASEAN Green Bond Standards and the Green Bond Project Endorsed Catalogue of China.
The total amount of green bonds was recorded at $258.9 billion in 2019, a 51 per cent increase from $171.2 billion in 2018, according to the Climate Bond Initiative.
Green bond principles aim to counter scepticism about whether all proceeds are really used to create new projects that help to mitigate climate change in the context of the Paris Agreement. The principles have been developed to align with global norms on what a green project should look like and to eliminate room for ‘green washing’, whereby green bonds are used to fund projects that are less likely to contribute to the green transition but bond issuers and investors still benefit from the association of being ‘green’. For example, in China, the central bank removed coal investments (such as coal-fired plants including clean coal technology) from the draft of its Green Bond Project Endorsed Catalogue (2020 edition), which provides the guidelines for the Chinese domestic green bond market. This removal marks a very important step away from the divergence of green bond principles across capital markets, and helps to maintain the legitimacy of global green bond markets, not least given the Chinese market’s position as the second largest green bond market in 2019, when it hosted $31.3 billion in green bonds.
Sustainable finance has developed through multi-stakeholder efforts including the United Nations Environment Programme Finance Initiative. Multilateral development banks (MDBs) are the leading funders of green projects. Globally, MDBs have made commitments that their combined global annual climate financing should reach $65 billion by 2025. ADB, for example, has set a target of $80 billion from 2019 to 2030, with at least 75 per cent of ADB’s commitment to support climate change and adaptation by 2030. The Asian Infrastructure Investment Bank (AIIB) also intends to increase its share of finance for climate change mitigation in its annual operation to more than 50 per cent by 2025. The efforts of ADB and AIIB include their respective investments or guarantee programmes on green bonds. The definition of ‘green’ has been carefully reviewed in line with market perceptions. AIIB’s intention not to finance any projects that are functionally related to coal, is expected to be reflected in the bank’s written energy policy in the near future. Bilateral Development Finance Corporations (DFCs) and commercial banks are also showing more appetite for green or sustainable finance.
Funding Asia’s infrastructure
The sheer quantity of infrastructure needed in Asia requires long-term financing. ADB estimates that the countries of developing Asia will need to invest $26 trillion between 2016 and 2030 to maintain its growth momentum, eradicate poverty and respond to climate change. ADB notes that the infrastructure investment gap stands at 2.4 per cent of projected GDP (2016–20) when incorporating climate mitigation and adaptation costs. This implies that the region needs to make extra efforts to attract more long-term investments and financing for its infrastructure projects. Potential finance providers for such long-term investments are pension funds, insurance companies, infrastructure funds, DFCs and MDBs. Some commercial banks have also maintained their appetite for long-term finance despite risks that accompany the need for high levels of capital reserves to potentially absorb future risks. Future infrastructure developments in Asia will be driven by matching key finance providers to existing demand for infrastructure.
COVID-19 effects
The COVID-19 crisis has had a severe impact across the region, affecting national economies and budgets that have been reallocated towards urgent medical infrastructure needs or short-term economic stimulus packages. However, the finance sector, including debt and equity capital markets, appears to be functioning as normal, unlike what happened during the global financial crisis. The pandemic has adversely affected economic activity, particularly consumption, due to lockdowns and travel restrictions, which first hit the economy and capital markets around March 2020. Swift action from governments with economic rescue packages alongside global joint monetary policy efforts have helped to restore confidence in Asia, based on expectations of a fast recovery and revitalized equity and financial markets. Quantitative easing by respective central banks created abundant liquidity that is now available for projects in need of financing while monetary policy led to interest rate cuts.
COVID-19 has temporarily overshadowed the green transition and sustainable development across Asia due to the change in policy priorities. According to Global Energy Monitor and the Centre for Research on Energy and Clean Air, during the first six months of 2020 China approved 17 GW of new coal-fired capacity for construction, which is more than the permitted allowance for 2018 and 2019 combined (12 GW). Experts interpret this move as a decision driven by fears of an economic downturn.
Given the growing power of the finance community across the world, it is increasingly important to have regional forums and bodies that enable policymakers, state-owned enterprises and the finance community to discuss green project developments. These forums and bodies could discuss realistic transitions to a low-carbon economy and practical options, including desirable incentives, to mobilize private capital for green and sustainable projects, and could generate long-term strategies to introduce new technologies into markets. They should include major economies in Asia such as ASEAN+3 and India to discuss cross-border projects. More project-oriented initiatives across the region would help to create a new green trajectory.
