Asean faces varied climate risks, but cooperative stance will stand grouping in good stead: Moody’s

ASEAN countries’ exposure to climate risk – and their approaches to decarbonisation – varies, but they do face some common challenges; what will be key to helping them manage their energy transition will be their track record of regional cooperation, says Moody’s Investors Service.

The ratings agency, in a report out on Monday (Oct 3) on the carbon transition in South-east Asia, said this cooperative stance will help the grouping with its transition challenges by aiding its development of common approaches to carbon pricing and sustainable finance.

The Asean economies are exposed to various levels of environmental risk, and their policy approaches and commitments to curbing emissions are similarly disparate, it said. But, they do face a number of common challenges, including heightened exposure to physical climate risk and carbon transition costs from their fossil-fuel dependence and reliance on energy-intensive manufacturing.

Physical climate risk

Exposure to physical climate risk is material for most rated Asean economies, Moody’s said, even as they vary by type of risk and by country. In the short run, Asean member states are more exposed to physical climate risk than to carbon transition risk, because of their relatively slow implementation of decarbonisation policies – this would also likely delay the transition costs for the region.

Singapore, however, is in a strong position to tackle environmental hazards, thanks to its substantial fiscal capacity and high quality of governance, despite being vulnerable to rising sea levels over the long term as a low-lying island country, Moody’s said.

Fossil-fuel dependence

The region is currently highly reliant on fossil fuels and will likely remain so in the next 10 to 15 years. And the ratings agency expects most Asean economies’ industrial structures and carbon-intensive electricity generation to drive future credit risks related to transition over the longer term.

Fossil fuels currently make up more than half of the electricity generation mix for nearly all Asean rated economies, and power demand among the region’s fast-growing economies is predicted to triple between 2020 and 2050, underscoring the transition risk.

The region’s government policies are expected to continue emphasising fossil fuels, given their low-cost availability, concerns over energy access and reliability, the higher cost of renewable alternatives in some cases and high prospective economic growth and power demand.

SOEs and banks

Moody’s expects government-linked entities to play a key role in their economies’ decarbonisation – with some exposed to transition and execution risks.

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The role of businesses in accelerating the energy transition

“The dominance of state-owned enterprises (SOEs) in the energy and utilities sectors signals that the brunt of transition costs will likely be borne by these companies over the long term. However, their greater focus on natural gas mitigates transition costs compared with oil-heavy peers in other regions,” the report said.

Meanwhile, banks’ exposure to carbon-intensive sectors will pose asset risks in the long term, with their legal and reputational risks expected to grow.

Some 15 to 30 per cent of bank loans across Asean are to carbon-intensive industries, Moody’s said, which sets a challenging path for banks and borrowers amid pressure from investors, regulators and social forces to decarbonise loan books.

Still, the grouping’s track record of regional cooperation will stand it in good stead – supporting the potential for green finance and a coordinated carbon-pricing mechanism.

Carbon pricing

“Asean’s history of facilitating intergovernmental collaboration on financial standards and a regional power grid provides a basis for (the) harmonisation of carbon pricing and trading… although, divergent environmental interests among its members and lack of common ground on guiding principles may make progress more gradual, as regional cooperation on carbon pricing and trading is relatively untested,” Moody’s report said.

It expects Singapore to continue taking the lead in carbon pricing, noting its participation in carbon-credit marketplace, Climate Impact X, and the Republic’s introduction of a carbon tax.

Still, the overall slow progress will expose the region to border carbon taxes in other jurisdictions, such as the European Union’s Carbon Border Adjustment Mechanism.

Green finance

Asean’s sustainable finance market is, however, more developed than its carbon pricing efforts – reflecting the fact that guiding principles are already in place and Asean financial institutions are leading the regional integration in managing their own carbon transition risk exposure.

“According to Moody’s ESG Solutions, the sustainable finance market in Asean almost doubled to US$10.8 billion by 2021, from US$5.8 billion in 2019. We expect the growth momentum in Asean to remain strong, as taxonomies provide better guidance for sustainable investment,” it said.