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Commentary: Sustainable infrastructure a key ingredient for a green economic recovery in Asean

06 May Commentary: Sustainable infrastructure a key ingredient for a green economic recovery in Asean

By Chen Chen Lee and Gan Meixi
For The Business Times

As governments around the world reel from the impact of the coronavirus, the International Monetary Fund (IMF) has issued a bleak outlook for Asian economies: zero growth for 2020 – a first for the region in 60 years.

Against a looming economic crisis, saving jobs and businesses is the first order of the day for many Asean governments – as seen in the stimulus packages that have been announced. With attention shifted to pressing health and economic needs, Asean’s nascent trajectory towards a low carbon economy runs the risk of being derailed.

Prior to the coronavirus, Asean’s infrastructure sector was booming and in need of US$210 billion in annual investment till 2030, according to the Asian Development Bank (ADB). The infrastructure sector holds one of the largest green finance opportunities in South-east Asia, in part due to the region’s need for infrastructure that is climate resilient and that supports green growth.

Recognising this, ADB and Singapore’s Infrastructure Asia inked a cooperation agreement last year to help governments in South-east Asia scale up bankable and sustainable infrastructure projects. The region already has a number of existing and planned sustainable infrastructure projects, including the Sembcorp Myingyan independent power plant – Myanmar’s first power plant to have integrated solar power generation – as well as Vietnam’s first large-scale floating solar power plant.

Asean still has massive unmet needs in infrastructure, especially in the transport and power sectors. The region’s ability to remain resilient in the face of crises depends on its success in alleviating immediate economic concerns, while staying focused on important long-term sustainability threats like climate change. Thus, the current crisis could be viewed as an opportunity to rethink and reinvest in sustainable infrastructure for the long term.

Yet early indications suggest this may not happen. For example, some experts have already predicted lower clean energy demand in Asean in 2020, as a result of current low oil prices and supply chain disruptions.

Promoting a common understanding of sustainable infrastructure

Currently, 90 per cent of infrastructure projects in Asia are state-financed, with support from multilateral banks such as the ADB and the International Finance Corporation. The complexity of infrastructure projects – including political risks and gaps in expertise affecting bankability, as well as the size and tenure of investment required – pose entry barriers for private financiers. At the same time, green and sustainable financing is currently lacking in the infrastructure space, with a lack of common understanding around what defines sustainable infrastructure commonly cited as a reason.

The lack of a common definition of sustainable infrastructure was a key finding from a new study by the Singapore Institute of International Affairs. This definition goes beyond identifying qualifying asset categories – such as renewable energy, energy efficiency, clean transportation and climate change adaptation. It also involves identifying material environmental and social (E&S) risks, and the sustainability standards and frameworks by which they are evaluated.

The study involved a total of 118 representatives from 49 organisations including government agencies, multilateral organisations, banks and investors, financial services companies, project developers, non-governmental organisations (NGOs) and academics based in South-east Asia.

With growing pools of green and sustainable capital available, identifying how governments, financial institutions and project developers can unlock more capital for infrastructure is a crucial next step.

Heightened global attention on climate change and international awareness of human rights issues has compelled more financial institutions to identify and incorporate material E&S risks and opportunities in infrastructure planning and development. Some of these include reducing carbon emissions and mitigating climate change, as well as the equitable treatment of employees and local communities.

As providers and arrangers of sustainable finance, financial institutions can provide more quality disclosure around their financing decisions. This includes the key E&S risks they consider, how they handle country-specific challenges, as well as their sustainability policies.

For example, the three leading Singapore banks – DBS Bank, OCBC Bank and UOB – announced in 2019 that they would no longer finance new coal-fired power plants. Ratings agencies can use these disclosures to develop robust E&S ratings mechanisms.

Financial institutions should also incorporate the key identified E&S risks into regular monitoring throughout the life cycle of a project. They should be prepared to work with their clients to mitigate these risks, keeping clients’ financing aligned with their sustainability strategies.

Asean governments, for their part, could partner with the industry to equip workers with sustainability-related skills and knowledge. This may include training on managing key E&S risks, and post-training job placement in different Asean markets. It could also include transitioning the workforce in fossil fuel-reliant industries towards cleaner technology.

Governments can also promote a common understanding of bankable sustainable infrastructure projects through regional knowledge sharing. An example is the ADB-Infrastructure Asia agreement. Governments can also work with multilateral organisations on regional standard setting for sustainable infrastructure. Common standards will better inform financing decisions.

Reframing infrastructure planning and financing through sustainable lens

In many parts of South-east Asia, infrastructure gaps continue to hinder economic growth. Infrastructure investment has been a common way to stabilise economies – it creates jobs, lays the foundation for future growth, and improves long-term competitiveness.

Covid-19 has also illuminated the need to strengthen health care, water and sanitation, and even telecommunications infrastructure. Governments could use the current need for economic stimulus to accelerate the shift towards sustainability, and plan infrastructure projects that meet higher environmental and social standards.

Given the strain that Covid-19 has put on already-tight government budgets, there is an urgent need for more private and blended finance to meet the region’s enormous infrastructure needs.

For the private sector, the current low interest rate environment provides an opportune moment to invest in infrastructure. According to a February 2020 Economist Intelligence Unit report, nearly seven in 10 Asia-Pacific investors said their sustainable investments perform better financially than their traditional equivalents. Investors also recognised an opportunity for portfolio diversification, as sustainable investments have shown to be more stable in times of volatility.

Given the long-term nature of infrastructure investments, decisions made now will determine our path for the next few decades. As part of post-Covid-19 rebuilding, there is an opportunity to reframe infrastructure planning – a cornerstone of the economy – through stronger environmental and social lens. This will make Asean economies more robust and resilient to future external shocks.

• The writers are from the Singapore Institute of International Affairs (SIIA). Lee Chen Chen is senior fellow and Gan Meixi is assistant director for Sustainability (team lead).

Source: This commentary was first published in The Business Times on 6 May 2020. Reposted with permission.