SINGAPORE - A report has said that South-east Asia would need US$2 trillion (S$2.7 trillion) in infrastructure investments over the next decade to enable it to switch to a greener, more sustainable economy and remain globally competitive.

The report, "Southeast Asia's Green Economy: Opportunities on the road to net zero", was launched on Wednesday (Sept 29) during Ecosperity Week in partnership with Microsoft and Temasek.

The Straits Times speaks to the report's co-author Dale Hardcastle, who is the Global Sustainability Innovation Center co-director and partner at Bain & Company, on South-east Asia's green energy transition opportunities and challenges.

Q: Where will the US$2 trillion of investments over the next decade come from?

A: The Asian Development Bank (ADB) estimates that about 40 per cent of infrastructure investments in Asia will need to come from the private sector. That South-east Asian governments are pandemic-strained further highlights the role the private sector must play in climate investments.

Of the US$2 trillion investment need in South-east Asia, more than half should target sectors that have historically been attractive to private investors, for example, renewable energy, green buildings and construction, electric vehicle (EV) ecosystems, and the like.

We are certainly seeing emerging action in green capital flows in South-east Asia. In 2020, about US$9 billion was deployed to green businesses and assets in South-east Asia across private equity/venture capital, corporate deals and infrastructure investments, with sectors attracting most capital being energy and green buildings and construction.

From our discussions with clients, and as investors ourselves, what is clear is that capital interest is surpassing the availability of high-quality assets.

To mitigate the risk to private investors while managing the cost to governments, tapping public-private partnerships can pay huge dividends. For instance, ADB's Asean Catalytic Green Finance Facility Fund aims to attract US$3 of commercial capital per dollar of public capital spent and has secured US$1.4 billion of financing for green infrastructure projects in South-east Asia.

South-east Asian governments can promote blended financing models to de-risk investments and attract more private capital while offering regulatory certainty and stability. Non-monetary regulations, such as feed-in tariffs and power purchasing agreements, can also stabilise the market enough to encourage investments. Vietnam's 2018-2020 solar boom, with capacity increasing 150 times in two years, is one example.

Pricing in externalities can also shift the risk-reward calculus for green versus non-green investments, so more must be done to build up South-east Asia's carbon pricing in the form of taxes or emissions trading schemes. This is under consideration for many South-east Asian governments now.

Regional and international collaboration between nations within and beyond South-east Asia will be paramount to addressing this investment need. For example, Japan established a US$10 billion investment and loan facility this year to aid South-east Asia's transition to cleaner energy. The World Bank Group also deployed about US$6 billion in 2020 to finance climate change and rural infrastructure projects - a 1.5 times increase from 2019.

Overall, these are promising signs that the investing momentum is building in South-east Asia - but there is much headroom to grow.

Q: South-east Asia clearly has a big need or imperative to green its supply chains, from factory operations and transport to supply of raw materials. How quickly is this happening and will it happen fast enough to meet the demands of customers and to remain a key economic growth driver in the region?

A: That's correct. South-east Asia has a big imperative to green its supply chains. In fact, South-east Asia is the start of many trade routes. The region accounts for about 92 per cent of rubber, about 90 per cent of palm oil, and about 22 per cent of semiconductor exports globally, along with many other resources.

Multinational corporations with net zero ambitions are, as such, shifting focus to South-east Asia.

For example, Unilever, with about 90 per cent of palm oil suppliers based in South-east Asia, announced a 2039 net zero target for its entire supply chain, while Samsung, with about 44 per cent of suppliers based in South-east Asia, now requires all its suppliers to be certified in environmental management.

The pressure on South-east Asian businesses and suppliers is increasing, and we are seeing promising action by regional actors.

Regional players, especially family-run businesses, have also come to the table in a big way over the past year. For example, CP Group, a leading Thai conglomerate, recently announced a 2030 group-wide net zero target, and Kuok Group, a multinational family conglomerate, introduced innovative circularity practices, energy efficiency assets and installed renewable energy assets in group subsidiaries.

Family-run businesses, which make up more than 85 per cent of South-east Asian businesses valued at more than US$1 billion, are well positioned to scale sustainability impact, given their streamlined corporate structures that allow for more nimble decision-making and an inherent sense of stewardship for inter-generational transfer.

Governments are also making investments to encourage adoption of green energy for the region's manufacturers and suppliers. For example, Malaysia's government recently launched its Green Technology Financing Scheme 3.0, which aims to deploy RM2 billion (S$648 million) of financing to companies to encourage the adoption of sustainable technology (for example, renewable energy)."

Q: South-east Asia has big energy needs as it grows. Can rapid investment in renewables and shifting away from coal and gas really meet the region's rightful need for energy?

A: Asean's Centre for Energy estimates that South-east Asia's energy demand will grow more than 100 per cent by 2040, so energy security is indeed a key concern and priority in the region.

As a developing region, South-east Asia will need to define concrete transition steps as part of its net zero plan. The transition away from coal and fossil fuels to clean gas and renewables is critical.

South-east Asia (especially less developed countries in the region) can look at this as an opportunity to leapfrog fossil fuels as an energy source completely, to cleaner sources of energy. This will avoid the risk of being locked into potentially stranded fossil fuel assets.

Beyond renewables, South-east Asia can look at other levers, including:

- Grid modernisation to increase the share of renewables in the region's energy supply, and to provide electricity access to the 45 million people without grid access today;

- Scaling electric vehicles and its charging infrastructure;

- Carbon capture utilisation and storage technologies will be crucial for transition industries such as fossil fuels;

- For the longer term, investing in novel low/no-carbon hydrogen technologies has the potential to unlock a multitude of economic opportunities in energy storage, chemical feedstock, transportation, et cetera.

Critically, we will need a regional, coordinated approach to carbon pricing and energy planning, for example, an interconnected grid for renewables to more efficiently match supply with demand across South-east Asian countries.