The choking smog that has smothered Thailand this year underscores the growing urgency for tackling climate change in Southeast Asia as the region sets out to achieve a low-carbon, climate-resilient economy.
The answer is for the region to accelerate the use of transition financing to spur hard-to-abate sectors to adopt cleaner technologies, increased energy efficiency and become greener in the long run.
Thailand has faced an annual outpouring of haze from February to May each year, as farmers burn their crop waste and the number of forest fires rises, but this year has been particularly acute. In March, health authorities reported that in the first nine weeks of the year, more than 1.3 million people had already suffered air pollution-related diseases.
This adds to the long list of risks countries face from climate change that already includes rising sea levels, tropical storms, floods and drought.
Moving to clean energy is key to combating climate change. Asean as a region is the world's fourth-largest energy consumer, but its current energy makeup is skewed towards traditional forms of power generation, with fossil fuels making up a solid 83% of its energy mix. Yet, demand for fossil fuel imports and emissions is only expected to increase.
Encouragingly, nine out of 10 governments across Southeast Asia have pledged to achieve net-zero targets by 2050, and the region has stepped up its expansion of renewables, electromobility and the green energy transition.
Vietnam is considering halving its planned coal power plants in favour of gas, wind and solar; and Singapore has unveiled a Green Plan 2030, outlining green targets for 2030 and introducing a circular economy focused on reducing, reusing and recycling.
DIFFICULT TRANSFORMATION
However, the transition requires greening the entire economy and not just growing the green economy. To move the needle, the region must progressively decarbonise across all sectors of the economy, in particular the carbon-intensive ones like steel, cement, transport, manufacturing, infrastructure and agriculture.
Those sectors often require complex and long-term transformations to reduce carbon output, including incremental efficiency steps that may not be seen as "green".
Now more than ever we must ensure there is greater investment in low-carbon technologies such as renewables, clean hydrogen, and carbon dioxide-removal technologies -- reducing emissions and driving down costs for consumers.
Unlike in energy, where solar and offshore wind is often cheaper in many parts of the world than fossil fuels, the low-carbon alternatives for carbon-intensive sectors are still too expensive. Conventional jet fuel, for example, is still much cheaper than sustainable aviation fuel.
This is where transition finance comes in. It targets sectors that are energy-intensive and cannot turn green in the short term because they lack alternatives that are economically viable or technically feasible.
Transition finance solutions complement those offered by ordinary sustainable finance. They bring in more issuers and investors as there is a possibility to be more flexible in the type of proceeds and targets.
In addition, transition finance is generally linked to specific outcomes and creates more accountability and transparency in financial markets. This reduces the risk of "greenwashing", where companies claim to be more eco-friendly than they really are. Successful transition financing also will build confidence in the ability of high-carbon industries to convert to greener alternatives.
Even if the advantages are clear, barriers to growth remain. Businesses have only just started to recognise that climate risks should be part of financial risk management, rather than just corporate social responsibility. There is still a lack of understanding and awareness of the relative rates of return on carbon-intensive assets and the associated financial risks of climate change.
Financial institutions need to become transition experts on a granular and sectoral level. Banks not only need to carry out detailed analysis of transition pathways, but must also deepen their understanding of their clients' operations and supply chains and how those businesses are set to transition.
There also are stumbling blocks to transition finance that banks cannot solve on their own. Investors struggle to price risk systematically and managers are increasingly wary of falling victim to greenwashing.
As well, there is a lack of consensus globally on the definitions and scope of transition finance. Additional transaction costs in reporting may deter firms from issuing transition finance products. The market currently provides limited incentives for companies to actively invest in the transition. Measurement of climate risk is still not fully developed and does not readily translate into pricing the cost of capital, for debt or equity.
DEFINING AND RATING RISK
The solution is a transparent system that defines and rates environmental risk, much in the same way that agencies like Moody's and Standard & Poor's categorise and rate financial risk. The EU has led the way, but other jurisdictions around the world also are developing guidelines.
Asean recently announced its support for a regional Asean Taxonomy of Sustainable Finance to serve as a common language, while complementing the national sustainability initiatives of its members.
The transition to a net-zero economy requires better integrating environmental, social and governance considerations into the assessment of broader investment risks, facilitating transition finance and encouraging greater transparency on sustainability-related data and reporting standards.
Once these are in place, banks can fulfil their role of turning savings into investments, recycling the excess capital of both developed economies and the growing wealth in emerging economies, particularly in Asia, in support of a sustainable future.
As one of the regions most vulnerable to climate change, Southeast Asia must work like a bloc with trans-regional policies and strong, joint efforts. The carbon-intensive industries must be a key pillar of climate finance policies. This will not only enable the region to transition towards greening entire economies, it also will be critical to meeting global environmental targets.
Giorgio Gamba is the CEO of HSBC Thailand
