How to mobilize more financing for Asia's energy transition
The following article is an opinion piece written for Nikkei Asia, Tomohiro Ishikawa, MUFG’s Chief Regulatory Engagement Officer and Masyita Crystallin, Senior Advisor to the Minister of Finance in Indonesia, stressed the urgency of mobilizing capital to catalyze energy transition in Asia. They emphasized the importance of creating a robust and inclusive financing system for transition projects, and proposed further ways to mobilize capital.
Climate change looms over the Asia-Pacific region. Of the nine countries worldwide facing the highest climate risks, five are in this region, partly as a consequence of the projected rise of the Pacific Ocean.
This threat is putting the region's long-term prosperity at risk. Climate-related costs could cause the region's gross domestic product to fall by as much as 26.5% by 2050, according to projections by the Swiss Re Institute.
A number of Asia-Pacific countries have pledged to reach net-zero emissions by 2050. However, the region faces a challenge in reducing emissions from high-emitting sectors, particularly energy, which accounts for close to half of carbon dioxide discharges in Japan and Southeast Asia.
Moreover, many of Asia's heavily emitting power plants, which primarily burn coal, are much younger than comparable ones in developed countries. This implies more investment and cost-sharing will be required to phase out these plants and scale up clean energy infrastructure.
Emerging and developing countries in the Asia-Pacific region are facing difficulties in accessing capital to finance their green transition even as their financing needs grow. Developed countries earlier pledged to mobilize $100 billion to address climate change in developing countries, but the funding target has not been met. According to the Organisation for Economic Co-operation and Development (OECD), most of the funds allocated have gone to middle-income countries with low risk profiles.
Only a few Asian economies, including China, Hong Kong and Japan, have transition financing available, and they account for most of the outstanding transition bonds that have been issued in the region, which includes the 10 members of the Association of Southeast Asian Nations, China, South Korea and Japan.
Although the volume of outstanding transition bonds tripled to $5.2 billion between December 2020 and September 2022, they still accounted for only about 1% of outstanding sustainable bonds in the region. The rest of the region is just beginning to issue guidelines and explore instruments for transition finance.
We need to create a robust and inclusive financing system for transition projects to facilitate mobilizing capital not only within the Asia-Pacific region, but also from the U.S. and Europe.
The first step to achieving this is to develop "bankable" projects for private banks and institutional investors to finance. A majority of financial market participants say that a lack of commercially bankable projects poses a significant obstacle to transition financing.
Lowering the cost of projects -- or the cost to commit capital -- could help attract investment. Reducing the weighted average cost of capital for coal plant owners from 7% to 3% would significantly accelerate the investment recovery period, making it possible to retire a third of the global coal fleet within a decade, according to analysis by the International Energy Agency.
This cannot be achieved without proactive public sector involvement. Governments and multilateral development banks (MDBs) can reduce the risks involved in financing transition projects. Fiscal policy and concessional finance can "crowd in" private financing by lowering investment costs and decreasing risk through equity or credit enhancements. MDBs can also leverage private capital with innovative approaches, such as equity investment.
The importance of expanding the role of MDBs in climate finance is rising as the global economy faces inflation and higher financing costs as monetary policy tightens. To boost the role of MDBs, Indonesia has emphasized the significance of callable capital and preferred creditor treatment as president of the Group of 20. While MDBs need to scale up their contributions, they should not compete with the private sector.
At a country level, it is important to have the right policies, regulations and institutions in place. Inconsistent policy frameworks have been cited in OECD surveys as one of the biggest obstacles for transition finance.
Putting a price on carbon can be a game-changing policy for addressing this issue. Unfortunately, the International Monetary Fund calculates that only 30% of global greenhouse gas emissions are covered by carbon pricing requirements and the average global price was only $6 per ton of carbon dioxide as of 2022.
Each country needs to take ownership of its transition to ensure that projects align with national climate policies and strategies, use national systems to increase accountability, and improve engagement with public and private stakeholders. Indonesia, for example, has set up the Energy Transition Mechanism Country Platform to channel blended finance for transition activities from both public and private financial institutions.
At the global level, it will be crucial to strengthen the climate information architecture to catalyze transition financing, including reaching a consensus definition about transition activities.
When it comes to private finance, financial institutions are hesitant to invest in the gray area between "green" and "brown" projects due to a lack of clarity about what constitutes a transition project. This increases the risk of "greenwashing."
The ASEAN Taxonomy for Sustainable Finance, which was recently updated, marks a significant advance toward providing transparency on transition financing in Southeast Asia. Nonetheless, it remains crucial to align these standards with other taxonomies across the globe to facilitate involvement by private financial institutions in transition projects.
Additionally, credible disclosure and reporting will be necessary to demonstrate the permanence of transition projects and their real contribution to emission reductions. The standards used for disclosure and reporting should employ robust methods with detailed accounting methodologies, and there should be a global baseline for sustainability disclosures.
Finally, it will be indispensable to have an independent verification organization whose assessments under international standards are globally recognized. Standards have to be designed to provide "decision useful" information to help facilitate international comparability and crowd in private flows.
It is important to remember that private financial institutions are facing a dual challenge of reducing the carbon footprint of their lending portfolios to demonstrate alignment with a net-zero trajectory and front-loading investment to accelerate the Asia-Pacific energy transition.
If the world is to keep the global temperature increase to 1.5 C or less, investment has to take place now and the short-term goal must be to mobilize more capital. Policymakers have an important role to play in facilitating capital mobilization across regions. When the world is burning, the amount of capital mobilized matters.
This article has been replicated with permission from Nikkei Asia and is available here <URL: https://asia.nikkei.com/Opinion/How-to-mobilize-more-financing-for-Asia-s-energy-transition>.