Raising Climate Capital in Emerging Asian Markets

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Photo credit: xuanhuongho / shutterstock.com

“More people and assets are impacted by flooding than any other climate-fueled disaster, which in turn keeps poor countries poor, and drives up the price of food and housing everywhere,” says Bessie Schwarz1.

Exposure to floods has grown by 24% globally since the turn of the century. By 2030, climate and demographic change will add 25 new countries to the 32 already experiencing increasing floods, with around 90% of flood events occurring in South and Southeast Asia. This is due in parts that economic development and people moving into flood-prone areas is significantly increasing the number of people exposed to floods in these regions2.

In August 2021, the United Nations reported that 380,000 people were affected by flooding in 20 counties in the states of Unity, Jonglei, Northern Bahr el Ghazal, Warrap, Upper Nile and Western Equatoria3.

There are reports of severe droughts in Vietnam affecting millions and cutting off access to clean water for daily activities such as cooking, bathing and drinking. The Vietnamese Ministry of Environment estimates that at least 9,000 people will fall victim to drought this year because they do not have access to appropriate water, sanitation and hygiene (WASH) facilities.

It is estimated that worldwide investment in infrastructure is expected to be USD79 trillion by 20404. However, the actual global investment need is closer to USD97 trillion. The USD18 trillion gap would require the average annual global infrastructure investment to be increased by approximately 23% per year indicating that existing public-sector budgets are not keeping pace with infrastructure financing. New alternative approaches are being explored to tap into the global capital markets and encourage more private sector investments using, for instance, concessional climate finance from sources such as the Green Climate Fund and Climate Investment Funds. These allow governments to assume a first loss position, reducing risk for private investors and facilitating more hybrid investing mechanisms for future infrastructure developments5.

Significant investment is needed over the next 15 years driven by a need to overhaul and replace ageing infrastructure in advanced economies and address the higher growth and structural change in emerging market and developing countries, especially with rapid urbanization taking place in many first and second tier cities.

Investing in sustainable infrastructure is aligned with the Paris Agreement and is critical to tackling the three central challenges facing the global community: reigniting growth, delivering sustainable development goals, and reducing climate risk. The definition of infrastructure includes both traditional types (energy to public transport, buildings, water supply and sanitation), and natural infrastructure (forest landscapes, wetlands and watershed protection).

Climate Change Adaptation

Restoring livelihoods and rebuilding economic and social infrastructure requires substantial financial resources, necessitating the development and implementation of financial strategies to manage disaster risks. Cities which directly face the threat and vulnerability of damage and losses from climate change and biological hazards will increasingly be expected to play a specific and proactive role to build resiliency into the overall master plan.

Where governments have been receptive to tackling head on the challenges of climate change, foreign investors have underscored this confidence and have forged partnerships to pursue urban development projects, leveraging technical expertise to build smarter and greener cities benefitting communities.

New Clark City, Philippines – A Case in Point

Nippon Koei (NK), an international engineering consultant and Surbana Jurong (SJ), signed a Memorandum of Understanding (MOU) in 2020, committing to deliver sustainable and resilient solutions to urban and infrastructure development projects worldwide. This is part of the firms’ joint action on climate change mitigation and resiliency.

Each partner will bring complementary expertise to this collaboration. NK has proven capabilities in disaster preparedness in Japan and government-funded projects in other countries including Official Development Assistance for world-class engineering design projects. SJ, on the other hand, has a track record in delivering innovative and smart solutions for sustainability and resiliency in master planning, urban, residential and industrial development, coastal protection and reclamation around the world.

Both consulting firms have been collaborating on sustainability and resiliency since 2018. A notable project is the 9,460-hectare New Clark City in the Philippines which apart from adopting smart solutions, embraces the UN SDGs including the principles of sustainability and resiliency which are integrated into the overall master plan and urban development framework.  Building on strong ties, NK and SJ will identify sustainable project opportunities globally, especially in Asia where public-private partnerships can encourage the adoption of smart technologies to scale up urban initiatives and solutions.

New Clark City
New Clark City in the Philippines touted as the first “smart, green, disaster-resilient city”

Danang City, Vietnam – Integrating Disaster Risk Management Into the Overall Master Plan

Notably in Danang City’s (Vietnam) industrial, commercial and infrastructure projects, project teams involved will identify a resilient and sustainable framework that lowers the propensity of risks. The development is expected to emphasize the necessity for integrating disaster management and risk mitigation strategies into the design, planning and construction phases. Resiliency strategies are highlighted in Table 1.

Dimensions of Urban Resilience
Table 1: Dimensions of urban resilience as discussed at the URF Tokyo, 2019

About 68% of the economic losses in Danang is due to flooding. The project team envisions an infrastructure design for Danang City that mitigates disaster risk through flood-control mitigation and adaptive strategies. SJ and NK are looking at opportunities to support both private businesses and the local government to develop Danang City.

Gearing Up Financing to Meet Climate Change Issues

Multiple climate-modelling efforts derived from the recent Conference of the Parties or COP 26 pledges, suggest that continued warming will raise temperatures to more than 1.5°C above preindustrial levels. In a scenario where 1.5°C of warming occurs by 2030, almost half the world’s population would be affected by climate changes related to heat stress, drought, flood, or water stress. Lower-income countries have larger population that would be subject to and vulnerable to at least one climate hazard6.

COP 26 inadvertently reinforced building greater resilience, where countries can improve their ability to maintain business continuity – a source of confidence and competitive advantage. McKinsey Global Institute estimated that based on the modelling scenario analysis, downstream electronics companies could lose up to a third of annual revenue if their supplies of chips were disrupted for five months.7

Companies are Responding to Calls on Green Financing

Earlier this year, SJ successfully priced an SGD250 million sustainability-linked bond to be due in 2031 (“bond offering”) under its USD1 billion multicurrency debt issuance programme. This is the first Singapore dollar-denominated sustainability-linked bond and the first public sustainability-linked bond issuance from a Southeast Asian based company. SJ will further expand and diversify its investor base with strong demand not only from Singaporean investors, but further afield, Hong Kong, Malaysia, Australia, China, Japan, Switzerland, Denmark, Portugal, the UK and other countries. The offering was more than six times oversubscribed, drawing over SGD1.7 billion in orders.

The bond is issued in accordance with its newly established Sustainable Finance Framework, guided by the Sustainability Linked Bond Principles (2020) developed by the International Capital Markets Association.

The sustainability linked bond complements other funding initiatives. In 2018, Surbana Jurong and Mitsubishi Corporation set up a new fund management company to provide project owners a capital bridge to drive urban infrastructure development, transit-oriented developments and affordable housing targeting emerging Asian countries including Vietnam, Indonesia, Myanmar, the Philippines, India and Sri Lanka. Such joint ventures tap on both partners’ know-how across financing and investing, as well as technical and risk analysis to deliver sustainable returns.

Raising Sustainability Standards in Infrastructure Assets

Looking back, in response to creating urban resiliency in 2015, the Sendai Framework for Disaster Risk Reduction 2015-2030 was adopted at the Third UN World Conference on Disaster Risk Reduction, as an international guiding instrument for disaster risk reduction through 2030.

The pressure is mounting for companies to account for climate change risks and effects on their business. Central banks and other supervisory authorities are now considering climate change as a risk to financial stability. This has led to the establishment of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015, and the Network for Greening the Financial System (NGFS) in 2017. Both are concerned with enhancing the quality of climate-related awareness, risk management and transparency.

There is greater awareness of accountability in sustainable development but the transformation of the traditional fiscal system to a sustainable financial system will take time to evolve. Currently, over 1,500 organizations globally, including over 1,340 companies with a market capitalization of USD12.6 trillion and financial institutions responsible for assets of $150 trillion support TCFD. Traction for TCFD has been reinforced through efforts of the World Business Council for Sustainable Development, the Institute for International Finance, the United Nations Environment Programme Finance Initiative, and other organizations. Although TCFD adoption is neither legislated nor regulated at this stage, many large asset managers and asset owners have requested and encouraged investee companies to integrate climate-related risks into their existing risk management processes – disclosing information on their risk management processes in alignment with the Task Force’s recommendations.

Scrutinising assets through rigorous Environmental, Social and Governance (ESG) rating standards is a key strategy to assess climate-related risks. Infrastructure assets such as roads, rail, bridges and other critical utilities require massive volumes of materials to build; construction lasts for a number of years, often decades, and the impact on surrounding communities is sizeable. Given the tremendous impact they have on the environment and surrounding communities, it is important that investors and financers of infrastructure assets can rely on a credible system of assessing climate risk before committing to fund their development.

Infrastructure sustainability considerations vary and fluctuate depending on the different stages of design and project development, location and requirements. Currently, there is no singular international framework which provides designers, consultants and asset owners with a holistic approach that fulfils industry leading ESG factors. Efforts are being made to create an international framework using a quadruple bottom line assessment framework – economic, environmental, social, and governance – to set and quantify sustainability goals from the design to operation stages. It also emphasises the importance of stakeholders’ engagement as well as good governance and decision making to ensure that projects maximise the benefits that they can deliver. It is currently utilised in Australia and New Zealand to assess the sustainability of the planning, design, construction and operation phases of infrastructure programmes, projects, networks, and assets.

While the rating scheme is still new to the region, adhering to its standards could unlock various new value propositions. This includes helping clients unlock access to green funds for project financing, an increasingly important area of focus; as well as resulting in projects that have a lower carbon footprint and optimally utilised materials. Post-construction, these projects also have reduced operational and maintenance costs.

The Way Ahead

This new concept offers a great opportunity to “leapfrog” the inefficient, sprawling and polluting systems of the past. Transformative change is needed to build and re-build our cities, how we produce and use energy, how we transport people and goods, and manage our landscapes. The challenge is urgent with a diminishingly narrow window for making the right choices because of capital lock-in and outpaced technology and a shrinking carbon budget. The next few years will be crucial in bringing about a fundamental change of direction. We can build cities where we can move, breathe and be productive where ecosystems are robust and resilient and where we can avoid the potential displacement of millions of people. This inclusive economic growth is significant as it will help eliminate poverty and reduce the risk of climate change. Now is the time to act.

The writer was an integral team lead for the development management of the 9,460 hectare New Clark City project in the Philippines, and is currently involved with the JICA (Japan International Cooperation Agency) initiative for disaster management study for Danang city with Nippon Koei.

Notes on Sources

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Martin Lim
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