The hidden costs of decarbonising Asia's emerging markets

RENEWABLE energy development in Asia has attracted significant interest from investors and governments in recent years, as it is seen as the panacea to global climate change. However, unbeknownst to many, such projects across Asia's emerging markets come with their own trade-offs, such as growing social and human rights risks.

The Covid-19 pandemic has fuelled the urgency to decarbonise global energy systems. Renewable energy generation has emerged as the ubiquitous proposed solution to address the world's growing energy demands and climate change.

Although China and Europe traditionally served as the two largest markets for global renewable energy projects, Asia's emerging markets now drive global renewable energy deployment due to rapidly declining energy generation costs. For example, Vietnam leads the pack in total installed renewable energy capacity in South-east Asia, followed by Thailand, Indonesia and Malaysia. Meanwhile, India is rapidly scaling up its solar and wind power plants to meet its aggressive target of 450 gigawatts of renewable energy capacity by 2030.

Most of these countries have theoretically pivoted from their large-scale reliance on coal towards gas-fired generation and renewables.

However, many governments have a limited understanding of the hidden environmental, social and governance costs and trade-offs. They are more focused on leveraging renewable energy projects to boost their investment credentials among global peers, creating a new lucrative asset class in public infrastructure projects and balancing international criticism of their continued reliance on coal. As renewable energy investments have expanded in countries with weak environmental and human rights protections, human rights abuse allegations against companies mining minerals needed for low carbon transition have also emerged.

For instance, a study by London-based human rights watchdog Business & Human Rights Resource Centre (BHRRC) in 2019 highlighted Chile, Zambia and Congo (which produce most transition minerals) as hotspots, where labour and environmental abuses in supply chains could be linked to the renewable energy sector.

Similarly, in Asia's emerging markets, the lack of an understanding of renewable technologies has led to dangerously miscalculated government incentives that are likely to do more harm than good. While renewable energy systems are less polluting than fossil fuels, there are mounting concerns over their long-term environmental impact on forests, biodiversity loss and depletion of water resources.

Large-scale projects in some countries are exempted from environmental reviews and public consultations. In India, the biggest projects are incentivised through government schemes and tend to be fast-tracked. Also, a new amendment to environmental impact assessment rules released in 2020 means that large solar plants do not need to conduct such assessments.

Given that most renewable energy projects are land-intensive, several Asian governments have unveiled incentives regarding land acquisition. Vietnam offers speedy land lease approvals and numerous other tax exemptions to renewable energy companies throughout the lifecycle of the project. While this streamlines access for developers and investors, the failure to consider the projects' impact on local communities when selecting sites likely creates long-term operational and reputational risks. Such policies foster increasing competition for land, governance and justice challenges that are both intractable and inextricably linked.

Globally, the push towards the adoption of renewable energy technology has disproportionately affected indigenous communities. The BHRRC study recorded more than 200 allegations of land and indigenous rights abuse, displacement, violence, and threats involving renewable energy projects in the past decade. A lack of awareness and involvement by local communities may trigger local unrest and even legal challenges.

Such issues have resulted in the rejection of development projects in countries, like India, Vietnam, Myanmar and Indonesia. Besides causing delays, expensive court cases and the prospect of compensation to communities threaten to significantly increase project costs. The most serious consequence is that poorly implemented projects carry higher risks of operational difficulties, thereby eroding the value of assets in the longer term.

Post Covid-19, several emerging markets have diluted labour laws, especially provisions on minimum wages, industrial health and safety provisions, to woo foreign investors in priority sectors and jump-start macroeconomic growth.

However, such policies are likely to exacerbate labour rights violations in the solar power industry, stemming from practices along the supply chain, ranging from factories producing equipment and mines that provide key minerals. These risks are likely to grow in coming years as renewable energy projects continue to shift to Asia's emerging markets, with weak land governance and poor enforcement of human rights protections.

Although companies expect governments to address and mitigate such challenges, they are unlikely to adopt and enforce strong environmental and social safeguards in national energy policies and other programmes that facilitate renewable energy projects.

For global investors and developers, failure to adequately identify and address the social impact of renewable technology will not only have immediate reputational, operational and legal repercussions, but also potentially undermine the sector's competitiveness in the long run. Businesses will need to adopt an integrated approach to manage environmental and social risks in this sector by focusing on robust human rights and community due diligence.

• The writer is a senior analyst at Control Risks, a specialist risk consultancy.