The need for sustainable finance

The report highlights the urgency for sustainable finance to address climate-related risks in Asia and the Pacific. Limiting global warming to 1.5°C necessitates a sixfold increase in climate finance by 2030, reaching over USD 4 trillion. A slow transition raises both physical and transition risks, as seen in the USD 62 billion capital costs for climate-vulnerable nations from 2008 to 2018. A disorderly transition would exacerbate financial risks, making immediate action essential. Increased transparency, climate-risk disclosure, and streamlined investment procedures are necessary to counteract these risks and boost sustainable finance flows.

Fiscal policies to mobilise sustainable finance

The report identifies key fiscal policies to drive sustainable finance in ASEAN+3 nations, focusing on sustainable finance roadmaps, tax incentives, green sovereign guarantees, finance subsidies, and green bonds. Fiscal policy roadmaps provide clarity and encourage private investment, as seen in the Philippines’ 2021 roadmap. These roadmaps are noted as one of the most effective tools to unlock sustainable investment by aligning cross-government efforts and providing clear, long-term planning. Tax incentives, such as Malaysia’s green investment tax allowance, incentivise green investments by reducing costs. Green sovereign guarantees, like Indonesia’s for renewable energy, help de-risk investments by providing government-backed assurance, making green projects viable for private finance. Subsidies for green finance, used in Singapore’s green bond grants, further reduce issuance costs for sustainable bonds. The report suggests these policies be coordinated across sectors to address structural barriers in sustainable finance effectively.

Implementation gaps

Challenges to sustainable finance implementation in ASEAN+3 include knowledge gaps, regulatory uncertainty, and lack of green investment pipelines. Currency risk, regulatory inconsistency, and the high costs of green bond issuance further deter investment. Feedback from market participants indicates that administrative complexity, lack of clarity, and the high cost of technical studies are key barriers. Structural barriers, such as short-term lending cycles in Indonesian banks, restrict long-term renewable project financing, while political uncertainty adds to investors’ concerns, highlighting the need for clear, stable fiscal policies. Notably, green bond issuance in ASEAN+3 has increased significantly, with annual green bond issuance doubling from 2019 to 2021, demonstrating strong growth potential despite these challenges.

Recommendations

• Long-term policy stability: Policies should be designed for stability and longevity. Codifying net-zero targets in legislation would support investor confidence and maintain commitment to climate goals.
• Green finance subsidies: These subsidies, as seen in Singapore’s bond grant scheme, are simpler to implement than guarantees and help reduce risk perception. They should cover issuance costs and assist smaller issuers.
• Tax incentives: Incentives like Malaysia’s green tax allowance encourage green investments by lowering costs. These incentives can attract investors who may not typically pursue sustainable projects.
• Green sovereign guarantees: These de-risk high-risk green projects, making them viable for private investment. Guarantees should be designed with clear eligibility criteria to ensure they meet green standards and attract global investors.
• Catalytic sovereign issuance: Issuing green, social, and sustainability bonds at the sovereign level can kickstart local green finance markets and draw in private sector players.
• Capacity building initiatives:
  • Training for financial institutions on climate risk assessment, sustainable investment evaluation, and taxonomy alignment.
  • ASEAN Catalytic Green Finance Facility: An example offering USD 1 billion in green project loans and technical support to build sustainable finance skills.
  • Enhanced stakeholder engagement to bridge gaps in sustainable finance understanding and encourage knowledge sharing on climate risk management.
• Non-fiscal policies:
  • National taxonomies: Develop clear national standards, aligned with global standards, to provide consistency and aid in identifying credible green investments.
  • Mandatory climate-related disclosures: These disclosures improve transparency and support the identification of sustainable assets.
  • Real economy policies: Implement renewable energy auctions, long-term offtake agreements, and sector-specific incentives (e.g., for electric vehicle battery production) to drive investment and support sustainable finance development.