Bridging the financing gap en route to a net-zero world

CURRENTLY, the world is not on a pathway towards achieving net-zero emissions by 2050. This is the target that is required to limit the global average temperature rise to below 1.5 degrees Celsius above pre-industrial levels to avert the devastating impact of climate change.

There is a significant need for investment by the private and public sectors into infrastructure to aid the orderly transition towards net zero. Based on McKinsey’s estimates, US$276 trillion of investment is required over the next three decades or approximately US$9.2 trillion annually.

This investment gap is most acute in the Asia-Pacific, which accounts for more than half of the world’s greenhouse gas (GHG) emissions. Countries in the Asia-Pacific region are also at various stages of economic development, with different capacities to make the necessary investments towards the net-zero ambition.

Investments are needed to support the structural shifts across various industries and sectors and in particular the power sector, which is a significant contributor to GHG emissions. Fossil fuels have traditionally been the most prevalent source of electricity in Asia. This is gradually shifting towards renewable sources such as solar, wind and hydro, with hydrogen emerging as an alternative.

Countries are now considering the importation of renewable energy across countries via interconnected grids as well as “smart” grids, which can help monitor usage and dispatch power across networks in the most efficient manner. For example, as part of its Green Plan 2030, Singapore is looking to quadruple its solar energy deployment by 2025 by covering the rooftops of its public housing blocks with solar panels. It is also looking to tap green energy sources from the Asean region, through electricity imports and hydrogen.

However, these structural shifts do have their challenges – such as managing the orderly phase-out of existing fossil fuel-based power plants. In Asia-Pacific, the fleet of coal-fired power plants is relatively young, with most built in the last 10 years with a useful life of 40 to 50 years.

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To give a sense of the scale, there are about 5,500 operational coal-fired power plants in Asia-Pacific, responsible for approximately 4.5 gigatonnes of carbon emissions annually. Without the orderly phasing out of these plants, it will be challenging for countries to execute investments into renewable energy and commence their decarbonisation journey. In addition, like many other types of infrastructure projects in Asia-Pacific, some new energy projects remain marginally bankable – that is, on the frontiers of the risk spectrum where financiers in the private sector remain hesitant to provide support.

Besides funding from governments, private sector participation in investments into infrastructure to facilitate the transition to net zero will also be crucial. Financiers stand at the intersection of investment flows into these projects and can help catalyse development through innovative financing solutions and programmes. There are three initiatives that can help address the funding needs of Asia-Pacific’s net-zero transition:

• Mobilising institutional capital into infrastructure

• Leveraging blended finance to support the development of marginally bankable projects

• Working with multilateral development banks, financial institutions and concessional finance providers to support the orderly phase-out of coal-fired power plants

Institutional capital

Firstly, there is capacity to mobilise institutional capital for infrastructure financing through the development of new products and platforms. Large-scale mobilisation of institutional capital for infrastructure financing helps to address existing market challenges and assist banks to recycle their balance sheets into new infrastructure projects.

One such example is the infrastructure asset-backed securities (IABS) asset class. This entails the securitisation of project and infrastructure debt. Bayfront Infrastructure Management developed the first-ever publicly issued securitised sustainability notes which were listed on the Singapore Exchange. Bayfront was established in 2019 by Clifford Capital Holdings and the Asian Infrastructure Investment Bank (AIIB) and has since raised over US$1.25 billion in funding from institutional investors. This includes dedicated sustainability tranches backed by approximately US$350 million of eligible green and social assets. Innovative and sustainable financing solutions such as IABS complement mainstream markets and give institutional investors greater access to the regional infrastructure sector.

Blended finance

Secondly, the use of blended finance to drive further collaboration between private and public capital, to support the financing of projects which are marginally bankable. Blended finance is the strategic use of development finance to catalyse additional commercial financing for sustainable development in developing countries.

As noted by Monetary Authority of Singapore managing director Ravi Menon in his recent speech at the “Transition Finance towards Net Zero” conference in October, blended finance is not new, but catalysing and scaling it require a fresh approach – with a need to reduce risks in marginally bankable transition projects through catalytic and concessional funding from the public sector, multilateral development banks and philanthropic sources.

As an example, Temasek and HSBC established Pentagreen Capital, a debt financing platform dedicated to accelerating the development of sustainable infrastructure in South-east Asia. The platform aims to deploy blended finance at scale to help unlock more sustainable projects. Clifford Capital Holdings and the Asian Development Bank (ADB) are supporting the initiative as strategic partners.

Collective efforts

Lastly, the collective efforts of multilateral development banks and a coalition of financial institutions (including concessional finance providers) aim to support the orderly phasing out of coal-fired power generation projects, as well as facilitate investment in renewable energy sources. The ADB is spearheading the Energy Transition Mechanism (ETM) in Asia which aims to accelerate the early retirement of coal-fired power plants, leveraging on private and public finance.

The ADB estimates that retiring 50 per cent of the coal fleet in three of ETM’s pilot countries – Indonesia, the Philippines and Vietnam – could cut approximately 200 million tonnes of CO2 annually. This would be one of the largest carbon reduction programmes in the world.

Achieving the net-zero ambition by 2050 will require the collective efforts of many constituents in the finance sector, working in close collaboration with governments, with urgent investment needed now. With significant momentum and alliances already being formed to drive decarbonisation, there is still hope that future generations will enjoy a better tomorrow.

The writer is group chief executive officer, Clifford Capital Holdings