Bridging the Investment Gap: Empowering Energy Transition Through Climate Finance
By Indira Pradnyaswari, Irdina Batrisyia and Aldilla Noor Rakhiemah
12 November 2024
The ASEAN energy blueprint, formally known as the ASEAN Plan of Action for Energy Cooperation (APAEC), positions the energy sector as a key component in advancing the vision of the ASEAN Economic Community for inclusive and dynamic regional economic integration. This vision not only fosters economic growth but also promotes sustainable development that aligns with global commitments on climate change. However, the energy sector currently accounts for 52% of the region’s CO2 emissions, making it the largest contributor and a critical factor in ASEAN’s climate strategy.
In line with international commitments to keep global temperature rise below 1.50 C, ASEAN Member States have pledged to achieve net zero or carbon neutrality. A successful energy transition is fundamental to reaching these targets. Shifting to a low-carbon energy system will substantially reduce greenhouse gas emissions from the energy sector, thereby supporting ASEAN’s broader climate and development objectives. Achieving these ambitious targets, however, requires a multifaceted approach, that integrates robust policy support, infrastructure readiness, and comprehensive financing schemes.
The energy sector, particularly renewable technologies, is attracting strong investor interest, yet ASEAN’s energy transition still faces a significant financing gap. As outlined on the APAEC, ASEAN needs to achieve the regional target of 23% share of renewable energy in primary energy supply and a 35% share in installed capacity by 2025, which would require a total annual investment of USD 180 billion. According to the 8th ASEAN Energy Outlook, the annual power investment alone required approximately USD 56 billion from 2023-2030, pointing out that higher cost is needed to mobilise the other energy-related sectors. However, the actual value of international renewable energy investment projects indicated a significant gap, which estimated not more than USD 43 billion in 2022.
Several challenges hinder the expansion of investments and the efficiency of the climate transition, including limited market opportunities, insufficient transparency, and a lack of regional coordination on climate-related actions. These issues prevent the establishment of a conducive investment environment. Initiatives like the Just Energy Transition Partnerships (JETP) in Indonesia and Vietnam, which aim to leverage international financial support for phasing out coal and expanding renewable energy, highlight the importance of having structured financial support mechanisms to accelerate the transition. As ASEAN continues to rely on international investment, it is important to create clear and stable financing ecosystems to support the energy transition and optimise its economic and environmental benefits. Therefore, there is an urgent need to develop a climate finance framework to address these gaps and accelerate ASEAN’s path to a low-carbon economy.
To close this investment gap, ASEAN needs a structured framework that provides clear guidance and incentives to mobilise both public and private capital effectively. Such a framework should outline a coordinated approach for channelling financial resources to support the deployment of renewable energy technologies and the development of supporting infrastructure. By providing clarity on financing mechanisms, such as green sukuk, green bonds, and other sustainable finance instruments, the framework can reduce uncertainty and make the sector more attractive to investors. This will help address the current investment barriers, including inconsistent policies, regulatory complexities, and fragmented market structures, which have previously deterred large-scale investment in the region.
The framework should also align with the principles of the ASEAN Taxonomy for Sustainable Finance, ensuring that investments are classified and directed in accordance with a shared regional understanding of what constitutes sustainable and climate-friendly finance. This alignment will provide consistency across ASEAN’s markets, increase investor confidence, and enhance the credibility of renewable energy investments in the region.
However, the current state of climate finance across ASEAN reveals significant gaps that need to be addressed to attract the targeted amount of investments. While some ASEAN economies, including Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, have started to develop sustainable finance policies, these frameworks are not yet fully established or harmonised across all ASEAN countries. This inconsistency limits the region’s ability to attract the large-scale capital needed for effective climate action. Therefore, developing a comprehensive climate finance framework at both the national and regional levels is crucial to establishing a robust investment environment and accelerating ASEAN’s energy transition.
Climate finance is defined as any financial resources and instruments that are distributed and utilised by countries to support global climate mitigation and adaptation plan. It comprises of local, national, or transnational financing drawn from public, private, and alternative sources of financing. In short, climate finance supports countries to reduce greenhouse gas emissions through several scenarios, such as funding clean energy investment. Although AMS have reaffirmed their commitment to addressing the climate targets, climate finance development is still under the initial stage and needs further exploration. Therefore, having clear climate financing roadmaps that comprises of structured investment plans is urgently needed in national and regional level.
Then, what should be ASEAN’s priority to gain more aid in climate finance?
Capital investment is a key driver of climate finance, especially for low carbon energy technology development. However, limited access to funding and international investment, higher risk profiles and higher cost of capital and complex regulatory processes can deter investors from deploying capital in the region. To overcome these hurdles, AMS must address cross-cutting regulatory frameworks and remove barriers to Foreign Direct Investment (FDI). By strengthening the fundamental aspects of policy and financing frameworks through stakeholder engagement, ASEAN can enhance its market attractiveness and facilitate seamless business transactions. This, in turn, will boost investor confidence and promote energy partnerships across the region.
Each AMS should establish a clear climate financing roadmap that includes both direct and indirect investments aligned with their climate mitigation and adaptation plans. These roadmaps should support the overarching net-zero and carbon neutrality targets, ensuring that investments are channelled towards priority areas.
A robust Measurement, Reporting, and Verification (MRV) system is essential to unlock climate finance and demonstrate progress towards climate goals. MRV promotes transparency by providing consistent and reliable information on climate actions and their outcomes, making it easier for investors to assess the viability and impact of projects. This transparency also fosters collaboration between countries and organisations, attracting additional financial support.
An effective MRV system helps identify and mitigate risks associated with climate projects, enabling stakeholders to make informed decisions. In this case, MRV should comprise of the multi-step process to measure the amount of GHG emissions reduced by a specific mitigation activity, such as renewable energy infrastructure projects. Essentially, the disclosure of data should follow guidance of global environmental reporting standards. While ASEAN is still in the process of developing comprehensive climate finance roadmaps, the region should simultaneously prioritise the implementation of MRV systems to ensure transparency and accountability for upcoming projects.
Financial institutions play a transformative role in mobilising climate finance. Beyond public investment, private capital is crucial for scaling up investments in energy transition projects. The ASEAN Climate Finance Mobilisation and Access Strategy is designed to support the access and mobilisation of climate finance across the region. For instance, Cambodia utilises the green bond to finance energy transition projects that is aligned with Detailed Guidance for Issuing Green Bond Standards and ASEAN Green Bond Standards.
Similarly, the Philippines’ central bank, the Bangko Sentral ng Pilipinas (BSP) has introduced 11-point Sustainable Central Banking (SCB) strategy to accelerate sustainable finance, whereby one of the flagships initiatives is to promote foreign ownership in renewable energy projects. By partnering with multilateral development banks and international donors, ASEAN Member Staes can accelerate renewable energy deployment and create a vibrant climate market.
Additionally, other financial options such as Official Development Assistance (ODA) or levies can be explored, depending on the cost-benefit analysis of specific projects. Promoting access to a diverse range of climate finance instruments will enable ASEAN to strengthen its renewable energy sector and attract long-term investments.
Establishing a comprehensive Climate Finance Framework is pivotal for boosting ASEAN’s renewable energy investments and supporting the region’s transition to a low-carbon economy. By prioritising structured investment plans, enhancing policy and financing frameworks, improving transparency, and promoting access to climate financing, ASEAN can pave the way for a sustainable and resilient future. A well-defined Climate Finance Framework, aligned with the ASEAN Taxonomy for Sustainable Finance, will ensure that the region is well-prepared to meet its ambitious climate targets.
Ultimately, crafting a regional climate financing roadmap is not just a strategic move—it is a vital necessity. Such a roadmap will attract the necessary investments, support innovative technologies, and create an environment where renewable energy can thrive. It is the cornerstone for securing the future of ASEAN’s energy security, economic resilience, and environmental sustainability. The moment for decisive action is now, and ASEAN must take the lead with a clear, reliable, and visionary climate finance strategy.
Indira Pradnyaswari is an Associate Research Analyst, Irdina Batrisiya is a Research Assistant and Aldilla Noor Rakhiemah is Senior Research Analyst at the ASEAN Centre for Energy (ACE). Together, they work on the ASEAN Climate Change and Energy Project (ACCEPT).
The views, opinions, and information expressed in this article were compiled from sources believed to be reliable for information and sharing purposes only, and are solely those of the writer/s. They do not necessarily reflect the views and opinions of the ASEAN Centre for Energy (ACE) or the ASEAN Member States. Any use of this article’s content should be by ACE’s permission.
