Asia Pacific needs to wake up to sustainable finance

If you think sustainable finance is winning the war on climate change in the Asia Pacific region, it’s time to think again.

That’s according to a new report from the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), which has examined the trends, challenges and opportunities around bankrolling for key Sustainable Development Goals (SDGs).

Sustainable Finance: Bridging the Gap in Asia and the Pacific pulls no punches when it comes to assessing the progress, or lack of it, when it comes to tackling the main causes of climate change in this pivotal region.

“It has been said that the battle for climate change will be won or lost in Asia and the Pacific,” says Subathirai Sivakumaran, Chief of Financing for Development Section, UN ESCAP.

“This also means that global achievement of the SDGs by 2030, whether it is Goal 13 on climate change, or other SDGs on energy, food and poverty will depend on achievement of the SDGs in Asia and the Pacific, home to 60% of the world’s population.

“The issue of ensuring that enough sustainable finance for SDGs and climate action is mobilised in Asia and the Pacific has massive implications for the world.”

From a business opportunity perspective, sustainable or green finance is also going to play a key role in capital markets. PwC says that green finance will be a US$22 trillion market globally by 2030.

Asia Pacific holds the key to SDG success or failure

At the ‘half-time’ stage between 2015 and 2030, the region is not on track to achieve any of the 17 UN SDGs. While there has been progress on all measurable goals, one significant goal has actually seen the region slip into reverse – unlucky for some, or rather all, that is goal 13 on climate action.

Policymakers, regulators and private finance need to plug the gap and accelerate action. 

There are many challenges that each of these stakeholders face, but the interesting thing that the report points out is how interconnected these stakeholders are, and how interconnected their challenges are. 

“Whether it is consistent and coherent regulation between say the finance and energy sector, or whether it is policy coherence between finance ministries and the environmental ministries, the importance of integrated, cohesive action that systematically incentivises the supply and demand for capital to flow into SDG and climate action areas cannot be overstated,” says Sivakumaran.

The scale of this coordination required at the country level constitutes a profound challenge to ensuring a timely net zero transition. Importantly, consistency and coherence in regulation and policy has a profound impact on the cost of capital, and a country’s ability to mobilise public and private capital. 

Sivakumaran points out two additional challenges highlighted in the report.

“Asian banks and private finance entities are slow in making net zero commitments by 2050 with credible transition pathways that also set out interim goals (such as in 2030, 2040 etc.),” she says. “If such commitments were in place, private finance could encourage the real economy to transition much faster. 

“The other challenge is also in building bankable green projects that align with the needs and standards of multiple investors, particularly in the countries that need it the most. Again, if investors had clear net zero commitments, the parameters of their financing may be able to fit the project pipeline available in such countries much better.”

Trillions needed to plug gap

So, how large is this sustainable finance gap? Some world leaders may want to look away now…

Estimates vary and continue to rise the more action is delayed. The latest Report of the Independent Expert Group to the G20 states that emerging markets and developing economies (excluding China) will need to spend US$3 trillion per year by 2030.

Globally, the Sharm-el-Sheikh Implementation Plan, agreed at COP27 in 2022 highlighted that the world will need between US$4 trillion and US$6 trillion per year to transition to a low-carbon economy. 

“The estimates consistently refer to trillions required per year to be deployed to financing the SDGs and climate action,” says Sivakumaran.

“While it is easy to throw one’s hands up at such a large number and conclude that this is not possible, our report also notes that there is indeed sufficient capital to meet these gaps. The question therefore is not how large is the gap but rather how fast can we meet the gap in time, given that the physics of the carbon budget is unforgiving, and we are already at 1.1 degrees Celsius of global temperature rise.”

Part of the problem when it comes to SDGs is the sheer scale of the journey required, which can make achieving those goals seem like an impossible dream. However, as Sivakumaran points out, there are positives to cling to – and the fact that sufficient capital is available is surely central to meeting those goals, no matter how far away they may seem.

“The opportunities are right there in front of us,” says Sivakumaran. “The question is one of how fast can economies transform to meet the needs of our future, and how fast can financing transform to meet the new economy’s needs. 

“This requires political will, of course, but also coordination and coherence by ministries and regulators, in executing the transition in a rapid and orderly manner.”

This gets to the crux of the matter – whose responsibility is this? Who should be funding sustainable finance? Should it be governments or the private sector?

Delivering this transition will involve engaging governments, central banks, commercial banks, institutional investors, and other financial actors. It is therefore everyone’s responsibility. 

Governments and international financial institutions can play a crucial role in providing initial funding for sustainable finance projects by serving as a catalyst for attracting private capital.  

“Asia and the Pacific is home to significantly large pools of private capital capable of bridging the gap in sustainable finance,” says Sivakumaran. “Private finance entities – including banks, investors, and businesses – will now have to step up to the challenge and drastically increase the scale of their operations.”

It is one thing having the capital available, quite another to spend it wisely. The planet simply does not have a second chance if the money available is wasted first-time around.

Given the rising energy demand and its contribution to emissions in Asia, a high priority should be placed on financing the just energy transition, says Sivakumaran.

This includes solving the difficult question of how to finance the phase-out of coal (or other fossil fuels) in an orderly and equitable manner. Urgent funding is also required for renewable energy and energy-efficiency projects.

Large-scale financing is essential for deploying new green technologies, such as green hydrogen, in hard-to-abate sectors, where commitments are many but financing is still lagging. 

If the finance exists, what is stopping deployment, and therefore holding back progress on achieving the SDGs?

“There are insufficient policies and regulations that incentivise financing towards these goals,” says Sivakumaran.

“There is also an absence of bankable projects in national pipelines. Green projects, particularly those centered on adaptation, often involve high upfront costs and longer-term returns. During this interim period, financiers face a spectrum of risks related to various factors, including country-level risks, industry-related challenges, and macroeconomic conditions. 

“The lack of robust policy and regulatory frameworks, especially in emerging fields like renewable energy and green technologies, adds to the challenges. Governments play a pivotal role in creating environments conducive to building invest-ready pipelines.”

The UN ESCAP report highlights ten principles for action – or a guide for countries to adopt. Each country will have a unique pathway towards financing SDGs and climate action, based on a unique combination of those ten principles. 

Ultimately, the report says every country in the Asia Pacific region is at a different stage in their journey, but this report can be used as a roadmap for policymakers, regulators and private finance to bridge the sustainable finance gap.