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Better regulatory frameworks in Southeast Asia to promote low-carbon investments: analysts

17 May 2022 Max Tingyao Lin

Southeast Asian nations will face increasing financial risks in the coming years and decades unless they can reduce their reliance on fossil fuels, according to analysts at the Climate Bond Initiative (CBI) and the International Energy Agency (IEA).

In two separate reports published this week, the organizations both concluded that, as a result, the region's governments need to enhance their regulatory frameworks to accelerate investments in low-carbon energy.

Among the 10 member states of the Association of Southeast Asian Nations (ASEAN), nine have promised to achieve net-zero emissions by 2050 or later to help counter climate change.

But Southeast Asian countries have made limited progress in decarbonizing their economies, with IEA data showing coal, oil, and natural gas still accounting for around 80% of their energy supplies.

In its Southeast Asia Energy Outlook 2022, the Paris-based watchdog expects the region's energy demand to increase by just over 3% on average per year in the decade to 2030 based on existing policy frameworks.

In this scenario, 75% of the incremental energy consumption will be met by fossil fuels, leading to a near 35% increase in CO2 emissions.

The IEA believes that such a development, aside from its negative environmental impact, will make Southeast Asian countries more vulnerable to high and volatile fossil fuel prices in the wake of Russia's invasion of Ukraine.

The region's annual energy imports bill is forecast to rise to $190 billion by 2030 before a further hike to over $300 billion by 2050, having stood at $43 billion on average over the past decade.

"Southeast Asia's reliance on fossil fuels to meet rising demand for energy is proving to be a significant vulnerability in today's energy crisis. Meeting energy security and emissions goals will require countries in the region to make major efforts to improve energy efficiency, accelerate renewable power generation, and switch to low emissions fuels," the IEA said.

Based on the IEA's recommendations, regional governments should aim to improve energy efficiency, phase out fossil fuel subsidies, expand renewable power generation capacity by 21 GW per year, and have electric vehicles account for 25% of new car sales by 2030.

This could help limit global warming to well below 2 degrees Celsius, and lead to a peaking of the imports bill in the early 2030s below $120 billion before a decline to $80 billion by 2050.

For this transition to happen, low-carbon energy investment needs to increase from $27 billion in 2021 to more than $150 billion a year by the late 2020s, the IEA estimates. Total energy investment per year will expand to $190 billion by 2030 from an average of $70 billion between 2016 and 2020.

While some ASEAN members, including Vietnam, are establishing ambitious renewable targets, the IEA said that overall the region's "regulatory frameworks for planning and pricing continue to be weak."

"Independent regulation, least-cost system planning, and cost recovery tariffs are rare in most countries. The de jure regulatory frameworks are well-designed, but putting them in practice—like determining electricity tariffs—has been challenging," the IEA report said. "The amount of capital mobilized … depends on policy and regulatory conditions."

Better regulatory frameworks will help unlock the potential of the private sector in the energy transition, according to the IEA, predicting that international and domestic private capital will make up 75% of all low-carbon energy spending by the late 2020s to cap global warming well below 2 C. Private capital accounted for almost 60% of low-carbon spending in the power sector in 2016-2020, but was lower in some other sectors.

"Financing future energy investments in Southeast Asia will require that private capital plays a stronger role," the IEA said.

Better taxonomy

An important step to establish better regulatory frameworks would be to classify what are "green" activities that can help reduce emissions and what are not, which could ideally steer finance towards decarbonization projects.

In its ASEAN economies' exposure to climate transition risks report, London-based nonprofit CBI called on central banks in the region to ramp up their efforts in developing taxonomies for low-carbon projects.

"They would need to define not just sustainable activities but also non-sustainable activities and transition taxonomies to assess entity-level strategies to decarbonize a firm's operations. Such transition taxonomies are important for industrial sectors, like steel, where fully 'green' technologies are not viable or technically feasible [currently]," CBI said in the report.

At the report's launch event, Central Bank of the Philippines' Assistant Governor Lyn Javier said she can see benefits from establishing such taxonomies, but is "scared" of this task due to some challenges.

Central banks in emerging markets in particular are facing difficulties in collecting sustainability data, while mid-sized and community banks are not yet equipped to adopt the taxonomies, Javier said.

Also, a taxonomy should not limit financing to small and medium enterprises in sectors as yet not ready for the energy transition, otherwise economic development could be derailed, she warned.

Luanne Sieh, head of sustainability at Malaysia-based bank CIMB Group, said central banks should provide clarity on a taxonomy's purposes and ensure it can be enforced efficiently. And there should be a "balance between ambition and what is realistic," Sieh added.

The CBI said its suggestion is based on findings that Southeast Asian economies are highly exposed to carbon-intensive sectors like coal mining, oil and gas extraction and production, and power generation.

Based on its analysis of Refinitiv data, CBI said 47% of the $338 billion in large loans in Indonesia, Laos, Myanmar, Singapore, Vietnam, Thailand, and the Philippines are allocated to those sectors. Outstanding lending to carbon-intensive sectors reached $124 billion in Indonesia, $132 billion in Vietnam, and $57 billion in the Philippines as of December 2021, according to the CBI report, citing central bank data.

Also, CBI found from Bloomberg data that the sectors hold 2,532 bonds worth a combined $198 billion in the 10 ASEAN members.

Most of the loans and bonds will need to be refinanced over the next 10 to 15 years, when fossil fuels could fall out of favor during the energy transition, the CBI said, adding that: "For countries where the fossil fuel-sector borrows locally, central banks must immediately consider how transition risks will affect investors' balance sheet, as this may pose a substantial risk to the stability of the financial system."

Posted 17 May 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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