INSIGHTS

ASIA Panel Discussion – Sustainable Investment-Financing

At the inaugural meeting of the Asia Sustainable Infrastructure Advisory (ASIA) Panel on 8 and 9 November 2021, Sustainable Investment-Financing was one of the three key themes discussed. The ASIA Panel members and invited industry leaders shared their insights on financing solutions for a more sustainable future.

Globally, asset owners are increasingly investing sustainably¹. Amidst greater emphasis placed during the recent 26th United Nations Climate Change Conference (COP26) to do so, the question remains on how Asia can build more sustainably. Against this outlook, Infrastructure Asia, Global Infrastructure Hub (“GI Hub”) and ASEAN+3 Working Group 1 on Infrastructure Financing (“WG1”) have co-organised a discussion on Sustainable Investment-Financing. This is one of three public discussions organised as part of the inaugural meeting of Asia Sustainable Infrastructure Advisory (“ASIA”) Panel. The discussion provided a platform for the infrastructure eco-system to discuss solutions and issues in financing and investing in sustainable infrastructure regionally. Below are some of the insights.

From L to R: Ms Keiko Honda (ASIA Panel Member), Mr Lavan Thiru (Moderator), Mr Scott Minerd (ASIA Panel Member)

A regional taxonomy is needed to provide sustainability standards and reduce greenwashing

Sustainable investments have grown to US$35.3 trillion in 2020 – up 15 percent since 2018 – and now account for about 36% of total assets under management globally². As the threat of a climate crisis intensifies, the demand for sustainable investment products will only continue to grow. However, greenwashing – the act of making false or misleading claims about the environmental benefits of a product – may disrupt this increased demand, according to a survey conducted by Quilter Investors in May 2021³. Amongst the investors who participated in the survey, 44% deemed greenwashing as the biggest concern.

The same survey found that investors looking to maximise their environmental impact have become increasingly sensitive to the possibility of companies exaggerating their green credentials, to capitalise on the growing demand for environmentally sustainable products. Better guidance on what constitutes as ‘green’ or ‘sustainable’ will give investors greater confidence in ensuring that their capital can advance sustainable objectives.

Taxonomies need to be interoperable and compatible with those of other countries while considering Asia’s needs

Internationally recognised taxonomies could be one option to channel investments into sustainable products. In Asia, a regional taxonomy on sustainable activities that is interoperable and compatible with other countries’ taxonomies can do just that, as Mr Gautam Mukharya, Chief Risk Officer at HSBC, suggested in his Opening Remarks. An example raised by Mr Mukharya was the Finance to Accelerate the Sustainable Transition Infrastructure (FAST-Infra) initiative, a globally consistent labelling system for sustainable infrastructure projects, which was introduced by HSBC, IFC, OECD, and World Bank Group. Mr Bertrand Jabouley, Director and Head of Sustainable Finance APAC at S&P Global Ratings, agreed that it would add credibility to projects and assure investors that their investments are allocated sustainably.

More importantly, the regional taxonomy’s interoperability and compatibility with well-regarded international taxonomies can also facilitate the international flow of capital for sustainable investments into the region, explained Mr Mukharya. Mr Lim Cheng Khai, Executive Director at the Monetary Authority of Singapore, similarly emphasised the importance of international collaboration to unlock cross-border capital flows. This could give industry participants confidence that their investments in infrastructure assets under one taxonomy remain eligible in other markets.

An example highlighted by both Mr Mukharya and Mr Lim is the ASEAN Taxonomy, which was created to accommodate the different levels of economic development within ASEAN. The taxonomy provides standards not only for sustainable products, but also for transition activities by defining credible transition pathways for hard-to-abate sectors, particularly the energy sector. Likewise, Mr Tsuzuri Sakamaki, Deputy Commissioner for International Affairs on Sustainable Finance at Japan’s Financial Services Agency, shared that Japan has developed basic guidelines to provide standards in defining credible transition pathways. These guidelines are based on transition strategy and governance, science-based strategic targets and pathways, and implementation transparency.

Taxonomies in Asia must not only consider new projects, but also existing projects as the region transitions to less carbon-emitting solutions. Ms Keiko Honda, Adjunct Senior Research Scholar and Adjunct Professor at Columbia University, highlighted that ASEAN’s population will continue to grow till 2060, in contrast to developed countries such as Japan and South Korea that have already hit their population peaks. As such, ASEAN would need to devise its own strategy to meet its developmental needs in a low-carbon manner.

Echoing this view, Mr Scott Minerd, Chairman of Investments and Global Chief Investment Officer at Guggenheim Partners, suggested that taxonomies in Asia ought to advance residents’ quality of life, consider Asia’s developmental needs, and be built multilaterally to be beneficial to the region.

Invited discussants at the Sustainable Investment-Financing public discussion, organised as part of the ASIA Panel meeting

Improving bankability of sustainable infrastructure projects can help attract more investments

It is critical to recognise that even the best-in-class taxonomies will not be able to remove some of the underlying challenges facing infrastructure projects in Asia. Mr Nishant Kumar, Managing Director Asia at GuarantCo, shared that while there is pressure for regional institutional investors to invest sustainably, there is a shortfall of bankable and sustainable assets. Mr Lim Cheng Khai added that 60% of infrastructure projects in Asia are considered not bankable, while 30 percent are only marginally bankable due to inappropriate risk allocation or insufficient project preparation. This could result in an under-allocation of global capital to finance Asia’s energy needs.

Appropriate risk allocation, risk mitigation, and blended finance solutions may improve the bankability of sustainable infrastructure projects in Asia. Ms Keiko Honda emphasised the need to allocate risks to appropriate stakeholders. She explained that while multilateral development banks (MDBs) can insure against risks such as government expropriation and breach of contract, private sector investors would need to share some commercial risks. Mr Scott Minerd elaborated that MDBs could work with private sector investors to pool their risks together and reduce individual risk profiles, or introduce insurance-linked securities to enable transferring risks to institutions that are prepared to take such risks.

Mr Premod Thomas, Chief Executive Officer at Bayfront Infrastructure Management, shared the company’s win-win strategy that facilitated the entry of more institutional investors into sustainable infrastructure projects through infrastructure debt. Bayfront Infrastructure Management was established as a bridge between banks and institutional investors. Banks look to recycle their balance sheets, whereas institutional investors want to get to investable infrastructure products. Bayfront’s Infrastructure Asset-Backed Securities (“IABS”) enable institutional investors to access a diversified pool of assets that have proved resilient over the past 18 months. The second IABS issuance has a sustainable tranche with underlying assets in renewables and socially sustainable infrastructure, which enjoyed a green premium over the conventional tranche and further crowded in new institutional investors.

Looking ahead, improved bankability in infrastructure projects would be critical for financing Asia’s longer term economic growth.

Financing energy transition in Asia is crucial to achieving economic growth sustainably

Energy is a sector that must be rapidly transformed in Asia. The region accounts for more than half of global energy consumption, yet 45 million people in Southeast Asia still lack stable access to electricity⁴. Much of Asia’s energy demand is presently met by fossil fuel⁵. To meet developing Asia’s infrastructure needs – while mitigating the effects of climate change – Asia will require US$1.7 trillion annually till 2030, more than half of which is needed in the energy sector⁶.

Invited discussants at the Sustainable Investment-Financing public discussion, organised as part of the ASIA Panel meeting

Significant investments are also needed in brownfield projects

Alongside a need to accelerate the shift to renewable sources of energy, capital must also be allocated to the reduction of carbon emissions from brownfield projects, particularly coal-fired power plants. Mr Niel Thassim, Managing Partner at Brookfield Asset Management, observed that brownfield asset managers require both capital and expertise to decarbonise their assets. In 2020, Brookfield launched a program to bring together large institutional partners from around the world to consolidate capital to support industries decarbonising their processes. Institutional investors can also extract value from these investments, thus turning them into attractive commercial opportunities.

That said, investors today are increasingly worried about stranded assets, remarked Mr Henri Blas, Chief Content Officer at Global Infrastructure Hub. Mr Blas also highlighted that Asia needs clear transition pathways. As the world adjusts to a low-carbon economy with climate change mitigation policies, technological breakthroughs, and changes in consumer preferences, traditional assets that rely heavily on fossil fuels may be prematurely devalued. In ASEAN alone, it is estimated that the stranded value of such assets could add up to US$60 billion.

Mr Pradeep Tharakan, Unit Head of Sovereign Energy Operations in the Greater Mekong Subregion at Asian Development Bank, shared that ADB’s Energy Transition Mechanism aims to provide financially feasible and structured solutions to phase out coal-fired plants earlier in developing Asia. Mr Michael O. Sinocruz, Assistant Director of Energy Policy and Planning Bureau at Philippine Department of Energy, shared about the Philippine Energy Plan, which provides clear transition pathways to give investors clarity on brownfield assets and the demand for renewable energy infrastructure in the Philippines. This gives investors confidence to allocate capital in accordance with the pathways.

Partnerships along the infrastructure value chain is key for success in sustainable infrastructure

Numerous stakeholders across the infrastructure value chain must collaborate to advance sustainable infrastructure in Asia. Governments play a critical role in shaping healthy regulatory environments, crafting clear transition pathways, and providing leadership on regional sustainability standards. MDBs also play crucial roles in allocating risk appropriately and devising risk sharing strategies. Furthermore, private capital players are essential for financing transition activities and sustainable infrastructure, given the limited financial capacities of both governments and MDBs. Banks and institutional investors can leverage on innovative financing solutions, such as blended finance and IABS issuance to modify their risk exposures and provide greater access to financing infrastructure projects.

¹ _{ABP Investments Commentary. SWF Global, LLC, 2021.}
² _{Global Sustainable Investment Review 2020. Global Sustainable Investment Alliance, 2021.}
³ _{Davidson, Gregor. “Greenwashing Tops Investors' Concerns around ESG Products, New Research Finds,” 24 May 2021}^.
4 _{Southeast Asia Energy Outlook 2019. IEA, 2019.}
⁵ _{Energy Transition in Asia-Pacific: A Marathon, Not a Sprint. S&P Global Ratings, 2021.}
⁶ _{Meeting Asia’s Infrastructure Needs. Asia Development Bank, 2017.}

This article is co-written by Lavan Thiru and Ng Jun Jie, Infrastructure Asia. Special thanks to insights shared by:

• Keiko Honda, Adjunct Senior Research Scholar and Adjunct Professor, Columbia University
• Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Partners
• Gautam Mukharya, Chief Risk Officer, HSBC · Henri Blas, Chief Content Officer, Global Infrastructure Hub 
• Bertrand Jabouley, Director and Head of Sustainable Finance APAC, S&P Global Ratings
• Kelvin Wong, Head of Power & Utilities, DBS Bank · Lim Cheng Khai, Executive Director, Monetary Authority of Singapore
• Michael O. Sinocruz, Assistant Director, Energy Policy and Planning Bureau, Department of Energy, Government of the Philippines
• Narsingh Chaudhary, Executive Vice President & Managing Director, Power Business – Asia, Black & Veatch
• Niel Thassim, Managing Partner, Brookfield Asset Management
• Nishant Kumar, Managing Director, Asia, GuarantCo
• Pradeep Tharakan, Unit Head, Sovereign Energy Operations, Greater Mekong Subregion, Asian Development Bank 
• Premod Thomas, Chief Executive Officer, Bayfront Infrastructure Management 
• Towfiqua Hoque, Senior Infrastructure Finance Specialist, Global Infrastructure Facility, World Bank Group 
• Tsuzuri Sakamaki, Deputy Commissioner for International Affairs on Sustainable Finance – Financial Services Agency, Government of Japan 
• Xie Fei, Director of Information Management Department, China PPP Centre