According to the Asian Development Bank (ADB), recovery strategies must not reverse past gains made in protecting a country’s natural environment and inadvertently end up supporting a growth in fossil fuel or carbon-intensive investments leading away from the Paris Agreement’s target trajectory. Southeast Asia alone requires an estimated US$3.1 trillion (US$210 billion) annually from 2016 to 2030 for climate change-adjusted infrastructure investments. However, with a financing gap estimated at US$102 billion per year for selected Southeast Asian countries from 2016 to 2020, the need for private sector financing to fill the gap was already critical even before the pandemic. The Covid-19 pandemic has altered the financing landscape, with earlier estimates of government funds available for green infrastructure sharply reduced as government budgets are diverted to large emergency relief programs. In the Southeast Asia region, estimates by the Development Bank of Singapore (DBS) and the UN Environment Inquiry indicate the “green finance opportunity” in ASEAN countries (before Covid-19) to be US$3 trillion (2016–2030) regarding four sectors: infrastructure; renewable energy; energy efficiency; and food, agriculture, and land use. One key aspect of attracting global flows of green capital is the acceptability and credibility of the “green” label on such infrastructure opportunities.
- The Green Bond Principles and recently the Social Bond Principles and Sustainability Bond Principles have become the leading global framework for the issuance of green, social and sustainability bonds for which the International Capital Market Association (ICMA) serves as secretariat;
- The Climate Bonds Standards and Certification scheme, a labelling scheme for bonds and loans, is used to prioritize investments that genuinely contribute to addressing climate change;
- The ASEAN Green Bond Standards and recently the ASEAN Social Bond Standards and the ASEAN Sustainability Bond Standards were developed to align with ICMA’s Green and Social Bond Principles, and Sustainability Bond Guidelines;
- The EU adopted in June 2020 the Taxonomy Regulation, a key piece of legislation that will contribute to the European Green Deal by boosting private sector investment in green and sustainable projects. It will help create a classification system for sustainable economic activities, that will create a common language that investors can use when investing in projects and economic activities that have a substantial positive impact on the climate and the environment;
- In the loan market space, the Loan Market Association (LMA) and the Asia Pacific Loan Market Association have issued the Green Loan Principles as a benchmark for the wholesale green loan market, and also the Sustainability Linked Loan Principles.
Green infrastructure projects in developing countries often have a higher risk due to a host of reasons — new technology, higher capital cost, higher operating expenses, and higher construction risk —and may not pass the standard risk appraisal processes of commercial banks. To make such projects bankable, and attract commercial financiers and achieve financial closure, specific de-risking support may need to be provided, among them:
- The Shandong Green Development Fund (SGDF) which is a transformational financing mechanism created with ADB support, aiming at leveraging $1.5 billion of funding to Shandong Province in China. The SGDF aims to blend funding from international financing institutions with private, institutional, and commercial finance for climate impacting subprojects. The subprojects must meet SGDF green framework criteria, aligned with the Green Climate Fund (GCF) investment framework;
- The Climate Finance Facility (CFF) at the Development Bank of Southern Africa (DBSA) is the first private sector climate finance facility in Africa using a pioneering green bank model. It aims to de-risk climate-friendly infrastructure projects and improve their bankability to attract private sector investment;
- The ASEAN Catalytic Green Finance Facility (ACGF) is a green infrastructure financing facility under the ASEAN Infrastructure Fund (AIF), with funding commitments from several global development partners including ADB, the EIB, Agence Française de Développement (AFD), Kreditanstalt für Wiederaufbau (KfW), the Republic of Korea and the EU. This initiative was launched in 2019 to accelerate the development of green infrastructure projects across Southeast Asia in support of ASEAN members’ climate change and environmental sustainability goals.
Government funds (Debt for Nature Swap Funds) and capital market instruments (Transition Bonds Assurance Fund) also play a role in de-risking projects from a bankability perspective.