Greening Southeast Asia’s Infrastructure Pipeline

Southeast Asia needs to invest $210 billion per year,¹ or about 5% of the region’s gross domestic product,² to construct new infrastructure that the region needs to maintain its economic growth, tackle poverty, and address climate impacts.

Countries across the region have made strong commitments to finance climate-resilient infrastructure. As the climate bank of Asia and the Pacific, the Asian Development Bank (ADB) has also raised its climate finance ambition to $100 billion for 2019-2030.

Ultimately, however,   private sector capital needs to be mobilized to bridge the climate financing gap. This requires new innovative approaches to attract private sector investment in green projects.

Raise the profile of green infrastructure

To raise the profile of green infrastructure investment opportunities, countries like Indonesia³ and Thailand⁴ have developed national sustainable taxonomies to ground investors and project developers in a common language and help facilitate the development of green loans, bonds, and index-linked capital market products. Having a green taxonomy can increase and direct the flow of global green capital into domestic markets, and can help ensure that investments are channeled into the right assets.

  Southeast Asian governments should also broaden financial frameworks to include green, social, sustainability, and other labeled bonds (GSS+) that can help finance their infrastructure needs. In Indonesia, state-owned enterprises can be encouraged to issue green bonds (including sukuk or Islamic bonds) to complement green infrastructure projects financed by the state budget.⁵

Introducing policy and institutional changes such as granting financial incentives to bond issuers by exempting the pre- or post-issuance cost, waiving the verification and external reviewer fee, or reducing or exempting the listing fee altogether, can also accelerate green finance, including the green bond market. Countries can also send a strong signal to the market by issuing sovereign green bonds and promoting the issuance of local green bonds.⁶

While sovereign issuers are the norm in nascent green markets, countries like the Philippines have shown that private sector green bond issuers can also take the lead, including private banks as well as renewable energy, infrastructure, and real estate companies. Even with these private sector issuances, the visibility of green investment opportunities needs to be enhanced so more potential investors are made aware of the large pool of financially attractive investments that are also green.⁷

Support critical finance channels for infrastructure development stakeholders

  Southeast Asian countries may benefit from a green infrastructure finance facility or a green project preparation facility that can provide capacity building, technical assistance, and advisory services to improve the bankability and investment-readiness of infrastructure project pipelines.

Some innovative financing mechanisms are already available. The ASEAN Catalytic Green Finance Facility (ACGF), an ASEAN Infrastructure Fund (AIF) initiative co-owned by ASEAN governments and ADB, is supporting Southeast Asian governments in preparing and financing infrastructure programs that promote environmental sustainability and contribute to climate change goals. ACGF has $1.9 billion in co-financing pledged by nine partners for green infrastructure, with 49% allocated to projects. Six GSS+ bond issuances are also being supported by ACGF, with $6.2 billion raised.⁸

Diversify risks and create more options for investors

  Countries aiming to build smart and sustainable cities will net new green investment opportunities if they incorporate climate risk exposure and environmental, social, and governance (ESG) criteria into infrastructure plans.

Investors can also make better-informed decisions when given an accounting for future depreciation of assets due to climate impacts, like change in precipitation patterns, temperature increases, and extreme weather events.

Countries like the Philippines—with an estimated 60% of its land area and 74% of its population exposed to hazards like floods, droughts, and cyclones—can benefit from such an accounting.¹⁰ Likewise, Indonesia—another country highly vulnerable to climate risks¹¹—can benefit from a similar type of accounting, especially in preparing public–private partnership projects. Transparency is critical to gaining the trust of risk-averse investors and development partners as well as fulfilling ESG targets.

  Promoting blended finance and de-risking, credit enhancement, and guarantee mechanisms for green transactions also improve the bankability of infrastructure projects. Global multilateral development banks can also help catalyze the local green bond market by providing credit enhancement in the form of guarantees or offering first-loss provisions, which protect investors from the loss of capital that is exposed first if there is a financial loss of security. For its part, ADB is leading support for GSS+ in the region by being an anchor or cornerstone investor for issuances.¹²

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