Labeled bond issuance growth in ASEAN has been impressive, but it’s not enough to meet the needs highlighted in the latest IPCC report

• ‘Delay means death’ warns UN Secretary-General at release of new report outlining the urgency of quick and large-scale climate-related investments for mitigation and adaptation
• Despite rapid growth, ASEAN labeled green and sustainable bonds remain concentrated in a few sectors such as energy, and need more issuer diversity to address all climate-related needs
• Financial institutions will be key issuers of labeled bonds to finance the physical and social infrastructure needed for a Just Transition and to reduce inequities that will otherwise be accentuated by climate change

UN Secretary-General António Guterres was unequivocal at the launch this week of a Special Report on Climate Change: “As climate impacts worsen — and they will — scaling up investments [in climate mitigation and adaptation] will be essential for survival… delay means death”. The report’s launch came as green, social and sustainable bond and sukuk issuance has accelerated and expanded, reaching many parts of the world where issuance was limited only a couple of years ago.

The urgency of the moment to expand investment was not lost on the working group that issued the report. The group’s co-chair, Hans-Otto Portner, said, “There is a brief and rapidly closing window to secure a livable future on the planet. We need to live up to this challenge.” A recent report by Capital Markets Malaysia’s Sustainable Investment Platform (SIP) and EY showed significant progress in terms of total issuance across ASEAN’s six largest economies in recent years, but more needs to be done.

The SIP’s report highlighted limitations in the concentration of issuance for energy-related projects, followed by green buildings and transportation. Almost half of green, social and sustainable (GSS) issuance across the whole ASEAN region was energy-related, such as financing projects to increase the installed base of renewable sources of electricity generation.

Energy is no doubt a critical part of combatting climate change, where some form of Net Zero pledges have been adopted by five of ASEAN’s six countries. Not only is energy typically the largest source of emissions for most countries, its trajectory significantly impacts other sectors’ efforts to reduce their own emissions. The impact of renewable energy is pivotal in many respects by decarbonizing other sectors that rely on electricity or those that can be electrified.

However, investing in new renewable capacity alone is not sufficient to meet the targets for energy and will need to be complemented by much more comprehensive investment in both mitigation and adaptation. Energy — combining the direct and indirect exposures in generation and demand-side sectors — is not the sole source of the GHG emissions that are of concern to investors and financial institutions.

The RFI Foundation has released detailed reports providing top-down estimates of where and what types of direct and indirect emissions make up different parts of the financial sector’s total financed emissions in Malaysia and Indonesia. Electricity generation is no doubt important, but the process we used identified directly financed sources of emissions as well as the indirect sources embedded across the electricity, transport and waste management on which they depend.

The breakdown of direct and indirect emissions data reveals the interconnections that help financial institutions and investors to take more effective action to reduce emissions of GHGs or to mitigate the impacts they are exposed to from climate change. Just like with the energy footprint, if an investor or financial institution is trying to measure the impact of directing additional financing to decarbonize primary sectors that are interlinked with so many other sectors, they will have to consider both direct and indirect impacts.

Energy is a big input into production. Transportation impacts both inputs and outputs through the system that moves primary and intermediary inputs and produced goods throughout the process before they reach consumers, and for moving people. Waste management, in the current economic system that is more linear than circular, is what’s left over or emitted during production and consumption. The importance of interlinked, non-energy-related sources of GHG emissions should be reflected by greater financing through GSS bond and sukuk issuance.

However, what we see to date is issuance concentrated in a specific sector and too little invested into sectors that have an impact on the decarbonization potential of other sectors. That means more transportation, waste management issuance, along with additional renewable energy and energy-efficiency investment. But it also means more investment in GSS bonds and sukuk issued by financial institutions, which has been rare in the ASEAN region.

One obstacle for these types of issuance in transportation, energy efficiency, renewable energy or waste management may be that the need for financing is far below the scale at which bonds or sukuk can be issued. And these smaller-scale projects can benefit greatly with intermediation through banks and having those banks raise the financing needed through GSS sukuk with dedicated uses of proceeds to the specific sectors.

If this has been a challenge even for smaller-scale renewable energy financing, it has been far more limited in terms of investments to create a Just Transition, or to finance adaptation. Reuters’ coverage of the IPCC report summarized the relevant sections as concluding that:

“Communities need to be bolstering infrastructure and rethinking their cities to deal with issues such as heat, flood risk or water availability. Efforts that improve livability while also reducing greenhouse gas emissions are ‘more urgent than previously thought’, the report says. Actions that prioritize equity and justice, including tackling gender or income inequalities, have better overall outcomes, it says.”

Direct capital markets issuance such as GSS bonds and sukuk will be able to support some of the priorities whose urgency has risen, such as large-scale adaptation projects related to infrastructure. However, many of the impact-oriented investments needed will only be available within labeled bonds issued by financial institutions.

In order for financial institutions to expand their ability to tap labeled bond markets for Just Transition or adaptation financing, they will have to think beyond financing energy, transportation and waste management infrastructure when they think of climate-related finance. They will have to recognize that physical infrastructure on the one hand can help adapt to the impact of climate change, but that both physical and social infrastructure can be viable sources of ‘climate-related’ projects.

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