Rapid urbanisation and industrialisation have transformed ASEAN into an economic powerhouse, making it the fifth-largest economy globally. However, ASEAN is also one of the most vulnerable regions to climate change. To ensure its continued growth and secure its path to becoming the world’s fourth-largest economy, it is imperative that the region focuses on climate risk mitigation and transitions to a more sustainable economy.
ASEAN Member States and businesses have started their transition journey. Financing is crucial in this effort, as ASEAN needs massive funding to successfully shift to a more sustainable economy. For example, the energy transition alone is estimated to require USD 2.94 trillion of funding by 2050.
In the quest to finance the region’s transition, ASEAN markets recorded USD 19.1 billion of sustainable bond issuance in 2023. This number only accounts for less than 10 per cent of total sustainable bonds issued in China, Japan, and South Korea. The ASEAN Member States are still in the early stages of developing sustainable finance markets, and several challenges persist. One of them is the limited supply and demand for sustainable finance products. The World Bank noted that, excluding financial firms, less than 100 firms in ASEAN have tapped sustainable equity and debt markets from 2017 until 2022.
Additionally, financing for companies operating in hard- to-abate sectors, such as steel, cement, chemicals, aviation, and electricity generation, has been relatively more limited than for green, sustainable, and sustainable- linked bonds globally. Meanwhile, these industries still play essential roles in the ASEAN economy, particularly as ASEAN has a well-established manufacturing sector of machinery, petrochemicals, electronics, and automobile. Furthermore, ASEAN energy still heavily relies on fossil fuels, with fossil fuels accounting for 83 per cent of ASEAN energy mix in 2020. Therefore, the transition in ASEAN should be carried out smoothly to avoid disrupting the region’s economy.
Considering this background, transition finance could play an important role in ASEAN’s transition to a more sustainable economy. Transition finance is defined by the Glasgow Financial Alliance for Net Zero (GFANZ) as the investment, financing, insurance and related products and services that are necessary to support an orderly transition to net zero. Transition finance could expand access to sources of finance for projects that may not qualify as “green” or “sustainable” but have the potential to contribute to ASEAN economy-wide decarbonisation. Nonetheless, the lack of a clear definition of transition finance might lead investors to fear their participation as greenwashing.
For this reason, the ASEAN Working Committee on Capital Market Development (WC-CMD) collaborated with the ASEAN Capital Markets Forum (ACMF) to develop the ASEAN Transition Finance Guidance (hereafter: the Guidance).