Can Southeast Asia prioritise climate over politics to bridge the financing gap?

In the run-up to the 28th Conference of the Parties (COP28) on climate change, Southeast Asia is in the spotlight not only as a hotspot for climate impacts but also for the urgency to take climate action. Policymakers in the region see the imperative for climate mitigation and adaptation but underscore the inadequacy of climate finance as an impediment.

The region, according to an estimate by the Asian Development Bank, requires US$210 billion annually through 2030 for climate-infrastructure investment. That amounts to 12 per cent of the US$1.8 trillion of sustainable-infrastructure investment needed annually through 2030 for emerging economies (excluding China), as estimated by an independent panel for this year's G20 meetings.

A significant proportion of the investment needed stems from the cost of transitioning away from carbon-intensive industries, investing in renewable energy, and improving energy efficiency. Additionally, protecting forests and adopting sustainable land-use practices are vital for carbon sequestration.

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Adaptation measures are also needed, including strengthening transport and energy infrastructure to withstand extreme weather, finding drought-resistant crop varieties, and activating early warning systems for natural disasters.

The amount of climate investment needed translates to roughly 4 or 5 per cent of the gross domestic product of all emerging economies, including those in Southeast Asia. Analysis suggests that two-thirds of that US$1.8 trillion figure, or US$1.2 trillion, will have to be raised domestically.

The remaining US$600 billion could come from international sources. About half of this amount would come from private debt and equity flows and the other half from public sources, mainly multilateral development banks. Considering that the World Bank's total lending was US$71 billion and the Asian Development Bank's US$20 billion in 2022, the climate financing gap would appear to be large.

There is an urgent need, therefore, to encourage multiple sources of climate finance from multiple stakeholders using innovative financing mechanisms. Political constraints preventing the opening of new avenues away from the monopolistic or oligopolistic hold of state-owned enterprises need to be addressed.

Doing so would help strengthen policy and regulatory frameworks that govern climate finance, including price signals such as financial incentives for green bonds. Government-linked and other state-owned enterprises in Indonesia, for example, should be able to issue green bonds to supplement green-infrastructure projects that are financed by the government's budget. Multilateral development banks can boost domestic green-bond markets in Indonesia and other countries by providing guarantees against the loss of capital.

Steps to raise the profile and credibility of green finance in domestic markets will help. As investments in renewables and other green ventures are typically risk-prone, greater transparency about the nature and intensity of those risks will help.

Accounting for climate impacts can be conducted in asset valuation, for example. In this way, the Philippines or Vietnam - countries with high exposure to extreme weather - would gain from more transparent accounting of the risks.

Better communication can also help. To promote a better understanding of green bonds and other index-linked products, Indonesia, Thailand, Malaysia, the Philippines and Vietnam have developed taxonomies that establish a common language for green investments.

Carbon markets and trading, underpinned by quantitative restrictions or taxes on carbon, can provide another source of finance for Southeast Asia. By putting a price on carbon, businesses are, in one way or another, motivated to reduce emissions.

These mechanisms create economic incentives for emission reductions by allowing the buying and selling of carbon credits. Southeast Asian countries can participate in international carbon markets, generating revenue from emissions reductions achieved through their climate projects.

Given the size of the financing gap, Southeast Asia should also tap grass-roots financing mechanisms. Community-based initiatives, crowdfunding, and social impact bonds can empower local communities to contribute to climate projects.

This bottom-up approach helps climate finance reach those most vulnerable to climate change. Frank Lysy, a former World Bank economist, notes that in cases where investments took place on a massive scale, be it in cellular mobile services or digital technologies, the viability of the technologies and supportive regulatory frameworks were key, not top-down financing by the public sector.

Climate finance is different from those instances, given the vast spillover harm inherent in emissions and the risks of clean technology. Nonetheless, the role of grass-roots financing should be capitalised on.

The nature and even the extent of climate finance can also be influenced by giving greater play to nature-based solutions defined by the International Union for Conservation of Nature as "actions to protect, sustainably manage, and restore natural or modified ecosystems".

One example of such an initiative is the East Asian-Australasian Flyway. The flyway, one of the world's greatest bird migration routes, utilises nature-based solutions that are also climate-friendly. The Philippines is also trying to employ nature-friendly solutions to mitigate flood risks in six river basins.

In line with the agenda for COP28, Southeast Asia needs to mobilise sizable resources to tackle mitigation and adaptation needs. Even though climate change is a pressing problem, policymakers are stretched by other urgent priorities and have to tackle multiple issues, such as food insecurity and healthcare.

Given such competing priorities, the urgency of climate action seems to take a back seat in the eyes of politicians and the public. But given the escalating climate catastrophe and its sizeable financing requirements, it will take a combination of avenues - domestic funding, multilateral support, carbon markets, private-sector engagement, and grass-roots financing - to bridge the gap.

This article originally appeared on the South China Morning Post (SCMP).

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