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😵‍💫 In the climate finance space, we often encounter jargon that is frequently thrown around in regular conversation. If you’re an insider in the space, then you’re probably already quite familiar with these terms but for outsiders like us, it can get quite confusing.

One example are the related terms “decarbonization” and “climate mitigation”

The usage of these terms unsurprisingly follows a similar trend since they’re used relatively interchangeably. To be specific though:

• According to the Oxford English Dictionary, decarbonization refers to the “reduction or elimination of carbon dioxide emissions from a process such as manufacturing or the production of energy.”

• According to the UNFCC, climate mitigation refers to “efforts to reduce emissions and enhance (carbon) sinks.”

📩 In this issue, we are going to discuss how climate finance relates to these two terms, specifically from a project finance perspective.

🤔 What’s the deal with project finance for decarbonization?

💰 As we mentioned on our climate venture capital issue, climate finance as a theme cuts across multiple sectors both within climate mitigation (reducing greenhouse gas emissions) ⬇️ and adaptation (building resilience to the effects of climate change) 🛡️. In last week’s climate insurance issue, we focused on adaptation in particular, but in this week’s issue, we’ll be focusing on mitigation.

🛢️ Mitigating climate change is one of the defining challenges of our time, and decarbonization—the transition away from fossil fuels towards clean energy and sustainable practices—is critical to this effort.

📈 Asia-Pacific’s carbon emissions have been growing disproportionately vis-a-vis the world overall.

🌏 Zooming into Southeast Asia specifically, the region accounts for around 9% of global emissions, with the commercial and industrial (C&I) sector alone generating roughly 1 gigaton of CO2 equivalent emissions per year across 300,000 businesses. Yet, Southeast Asia also presents immense opportunities for emissions reduction—an estimated 300-330 million tons of CO2 equivalent could be abated through the deployment of small-scale (sub-$5 million) decarbonization assets like rooftop solar, energy efficiency upgrades, and electric vehicle infrastructure*

*note: source is based on Wavemaker Impact’s internal carbon abatement & market sizing methodologies

While capital is indeed beginning to flow towards climate mitigation use cases…

…current funding towards such decarbonization initiatives are woefully inadequate.

💵 Mitigation finance represents the vast majority of climate finance in Southeast Asia. Project finance, a specialised form of financing typically used for large-scale infrastructure projects, plays a pivotal role in facilitating decarbonization initiatives around the world.

🟢 Green assets often require specialised forms of financing, akin to the project finance structures commonly used for large infrastructure projects such as highways, airports, and telecommunications networks. Project finance is characterised by high leverage, long-term loans, and a standalone company concept where the project is legally isolated from the original promoter's ownership.

🧩 In terms of relative funding proportion against the backdrop of climate finance in Southeast Asia, project finance constituted around two-thirds of all climate finance flows.

✌️ In the context of decarbonization, project finance offers a couple of advantages:

1. The collateral for these loans are the future operating assets and their associated revenue streams, rather than the balance sheets of the project developers, which allows for a more efficient allocation of risk

2. The "off-balance sheet" nature of project finance enables developers to pursue decarbonization initiatives without overburdening their own balance sheets.

Despite the suitability of project finance for green assets, the deployment of small-scale decarbonization projects in Southeast Asia has been hindered by significant barriers. While 80% of funds for decarbonization projects in the region go towards large, utility-scale initiatives, the market for sub-$5 million assets is estimated to be 5-6 times larger, presenting a major untapped opportunity (IRENA, 2018).

Green project developers often struggle to secure the necessary financing to deliver more than one-third of their secured project pipelines. This is due to a confluence of factors:

1. 📃 Stringent requirements: from local banks, who demand 100% collateral and will only finance projects once they are already operational and generating cash flow.

2. 🦣 Large minimum deal sizes: that are typically $20 million or more due to the fixed costs of due diligence that institutional investors—which are defined here to mean development finance institutions (DFIs), international fund managers, and other green capital allocators—typically face, which make smaller projects unviable.

3. 👇 Lack of customer demand: for upfront capital expenditure (CAPEX) models, as end-users in the commercial & industrial (C&I) sector are often unwilling or unable to fund decarbonization assets themselves.

These challenges severely constrain the ability of developers to deploy small-scale decarbonization assets at scale, despite the significant market opportunity.

Overcoming these aforementioned barriers to project finance for decarbonization in Southeast Asia requires concerted efforts by various actors in the space to work in unison towards solving this common goal. Several promising initiatives are already underway:

1. 🏛️ Governments are launching programs to de-risk and catalyse private investment in clean energy, such as Indonesia's Sustainable Finance Roadmap and Malaysia's Green Technology Financing Scheme. Moreover, intergovernmental collaborations have resulted in the launch of the ASEAN Catalytic Green Finance Facility, a platform managed by ADB that is designed to mobilize an additional $7 billion for low-carbon and climate-resilient infrastructure projects in Southeast Asia.

2. 🏦 Financial institutions are developing tailored project finance solutions, including flexible debt and equity products, to support decarbonization projects of various sizes. For instance, Vietnamese bank MDVI stands out as having financed over a thousand renewable energy projects, leveraging loan guarantees as an innovative approach for driving this outcome (OECD & WWF, 2022).

3. 🧑‍💻 Technology-driven startups are emerging to streamline the project finance process, reducing the high fixed costs that have historically prevented smaller deals from being viable. In fact, the interview in this week’s issue highlights one such innovation.

📚 Want to learn more about this topic?

1. Climate Finance Landscape of Asia Pacific by Asian Development Bank

2. “Catalytic Capital Holds the Key to Southeast Asia’s Green Transition on Project Syndicate

📢 Shout-out to RegenX!

🧑‍🌾 RegenX is an AgriFinTech company focusing on decarbonizing smallholder agriculture in Southeast Asia. They support farmers to transition from chemical fertilizers to composting to reduce their cost and their carbon footprint without negatively impacting yields.

⏩ Unlike most carbon startups, they drive actual change in farmer behaviors by building a scalable support network, while at the same time measuring both practice and outcome metrics using technology as an enabler.

🔢 The unique, ground-truth dataset they’re able to create allows them to accurately measure real decarbonization rates, real farmer livelihood improvement as well as improvement in soil health. 

📲 They’re currently hiring ambitious people who love the startup grind and deeply care about smallholder farmers to join our implementation and Farmer Success team. For more information, you can check out their website!

🗞️ Recent News

🎙️ Interview with Ed of Refy

💡 Why were you initially inspired to tackle financing decarbonization assets/projects to begin with?

💱 When I looked at the green infrastructure space, I was struck by the significant mismatch between the massive market opportunity for small-scale decarbonization assets in Southeast Asia and the lack of available financing options to bring these projects to life. My background in structured finance at Goldman Sachs and founding a BNPL startup gave me valuable insights into the challenges of accessing capital, particularly for emerging industries:

• During my time at Goldman, I saw firsthand how large, complex infrastructure deals were able to secure funding through specialised project finance arrangements. However, these same tailored financing solutions were largely inaccessible for smaller, sub-$5 million green projects—the very assets that could have the biggest collective impact on emissions reduction in a region like Southeast Asia.

• My experience founding a BNPL startup also highlighted the transformative power of technology in democratising access to capital. I realised that by combining innovative project finance structures with AI-powered automation, we could drastically reduce the barriers that have traditionally prevented smaller-scale decarbonization projects from obtaining the necessary funding.

🚀 This combination is what inspired me to launch Refy—a venture dedicated to unlocking green asset financing across Southeast Asia. By providing developers with flexible project finance solutions and empowering them with a technology platform to streamline the financing process, we aim to catalyse the deployment of high-impact decarbonization initiatives that have long been overlooked by traditional capital providers.

🛠️ How exactly is Refy taking action against this problem?

🌏 At the core of Refy's approach is a deep understanding of the unique challenges faced by developers of small-scale decarbonization assets in Southeast Asia. As mentioned in the first section, there are three key pain points that have historically constrained the flow of capital towards these critical climate solutions:

1. 📃 Stringent requirements from local banks

2. 🦣 Institutional investors' high minimum deal sizes

3.  👇 Lack of customer demand for upfront CAPEX models

To address these three challenges, Refy is taking a multi-pronged approach:

1. 🤸  Democratising access to project finance: We're providing developers with tailored financing solutions, including flexible debt and equity products, to support the deployment of sub-$5 million decarbonization assets. By offering innovative structures that are better aligned with the risk profiles of these smaller projects, we're helping to unlock capital that has traditionally been out of reach.

2. 🤖 Leveraging technology to reduce friction: Our AI-powered technology platform is designed to streamline the entire project finance lifecycle – from deal sourcing and due diligence to contract negotiation and portfolio management. By automating and standardising these historically manual and costly processes, we're able to significantly lower the barriers to accessing financing for smaller green projects.

3. 🤝 Connecting alternative capital with bankable deals: Refy is actively engaging with a diverse array of investors, from impact funds to high networth individuals, who are seeking to deploy capital towards overlooked, but high-quality climate solutions. By aggregating a pipeline of thoroughly vetted, technology-enabled green assets, we're creating a pathway for these alternative sources of financing to support decarbonization initiatives at scale.

Through this multifaceted approach, Refy is tackling the root causes that have historically constrained the flow of capital towards small-scale decarbonization projects in Southeast Asia. By democratising access to project finance and leveraging technology to drive down transaction costs, we aim to catalyse a massive expansion of climate-friendly infrastructure across the region.

😲 What is a misconception or surprising fact about financing decarbonization assets/projects?

❌ One of the most surprising facts about financing decarbonisation in Southeast Asia is the significant mismatch between the available funding and the actual deployment of capital towards green projects.

💸 For example, a major development finance institution has earmarked over $500 million to support the green transition in one of the region's key markets. Yet, in 2022, only around $50 million of that funding was actually deployed. This stark disparity highlights a key misconception: that the primary barrier to scaling decarbonisation is a lack of available capital.

🧱 The misconception that decarbonisation is primarily hampered by a lack of funding, rather than the accessibility and scalability of financing mechanisms, is one that needs to be challenged. Only by recognising and addressing the nuanced barriers to green project finance can we truly unlock the full potential of the trillions of dollars in capital that are poised to support the clean energy transition.

🎬 How can readers support Refy?

There are a few key ways that readers can support Refy's mission to accelerate the deployment of small-scale decarbonisation assets in Southeast Asia:

🤑 Investments: If you're an accredited investor, family office, or institutional fund manager interested in earning attractive, sustainable returns, we'd encourage you to connect with our team to learn more about our offerings!

🧑‍💻 Hiring: As we rapidly scale our operations, we're constantly on the lookout for talented individuals to join our team. Whether you're an experienced project finance expert, a skilled AI/ML engineer, or a passionate sustainability advocate, we'd love to hear from you.

🦸🏻 What do you do when you’re not saving the world?

When I'm not immersed in the mission of accelerating decarbonisation finance, I balance my time between a few key passions, namely: 🏋️ crossfit workouts as well as 🤖 tech, AI & coding projects

❓ Did you enjoy this week’s issue? If yes, please do forward to your friends who would enjoy the read as well. Also, feel free to let us know what you thought by giving us feedback at [email protected].

🌊 SEA you next week!

Karina & Massimiliano