Making Asean’s recovery sustainable

Regional pandemic recovery fund should prioritise projects with green goals, says HSBC

Linking the project selection principles of the new Asean Pandemic Recovery Fund to the region’s climate and sustainability commitments should be high on the agenda for Asean leaders.

The fund, to be launched at the Asean leaders’ summit in November, will focus on filling the region’s US$2.8-trillion infrastructure gaps over time, while providing more immediate stimulus to struggling economies affected by Covid-19.

However, over and above the existing infrastructure deficits, the Asian Development Bank (ADB) has projected that Asean GDP could fall by 11% by 2100 if climate change issues aren’t addressed.

These include protecting the region against natural disasters including rising sea levels, ensuring stronger food security, and moving towards less carbon-intensive energy sources.

Given high rates of population growth in South Asia and Asean, HSBC sees containing per capita emissions growth will be one of the most important factors determining whether the world will be able to meet the Paris Agreement goals to keep global warming below 2C or even 1.5C above preindustrial levels.

“Asean member states will be working on how the design is structured and the type of projects that will be eligible, so there is a perfect opportunity to link its project selection and risk assessment framework to the region’s climate change agenda and its UN Sustainable Development Goal commitments,” said Kelvin Tan, chief executive of HSBC Thailand. “Doing so will catalyse the flow of much-needed institutional investment to plug government spending gaps, build future economic resilience against natural disasters (including rising seas levels), and help the region move away from high-emission development pathways.”

There are several steps for how infrastructure development could be more strongly linked to sustainable development. Some can be adapted now and others will take time. Here are three:

1. Develop a common language around what sustainable infrastructure projects look like: Asean member states need to agree on common definitions for what are considered “green” or “sustainable” activities and investment practices.

A way this can be more readily achieved is to try to localise green standards or taxonomies that have already been implemented in other jurisdictions, like Europe, rather than build its own. In fact, the EU — in its recovery budget plan announced at the end of May — said that “green” would be a guiding focus and that its EU taxonomy will play a role. Asean nations could agree to adopt these taxonomies now and refine them over time.

2. Integrate ESG as part of the risk assessment and evaluation: Institutional investors are keen to invest in sustainable infrastructure, which can offer stable, long-term returns. However, largescale infrastructure projects in Asean often involve a variety of environmental, social and governance (ESG) risks that prevent private-sector investment.

The way these activities are assessed for risk should be linked to the formulation of green and sustainable definitions. These include risks related to the design and construction phases of a project, post-construction payment and the policy environment.

Project participants — including banks, project developers, investors and governments — need to have a common understanding and process for how to assess ESG risks.

Both the International Finance Corporation’s Environmental and Social Performance Standards and the ADB Safeguard Policy Statement are the most commonly referenced international standards by financial institutions today and serve as a good starting point. They can be adopted now by Asean governments.

3. Develop financing solutions for sustainable infrastructure development: While project participants can bring ESG risks within range of investor appetite, it may not be enough to get them over the line for the investment to happen.

A way to overcome this challenge is to adopt a blended finance approach where these risks are shared between the private and public sectors. By reducing the risk profile of sustainable infrastructure projects, blended finance can allow investors to participate in financing projects they would not otherwise be able to support.

While some infrastructure projects in Asean have already benefited from the use of these instruments, further work to standardise the approach is needed.

“Applying sustainable development goals to the Asean Pandemic Recovery Fund makes complete sense for the region,” Mr Tan said. “It will help bridge the gap between the investment needs and government budgets by attracting private investment across banks and institutional investors; it will help Asean markets who are vulnerable to climate-related natural disasters like flooding build preventative infrastructure and, therefore, economic reliance; and it will help nations meet their Paris Accord and other UN Sustainable Development goals.”

‘‘ By reducing the risk profile of sustainable infrastructure projects, blended finance can allow investors to participate in financing projects they would not otherwise be able to support.