In partnership with

Hello! Halo! Kumusta! Xin chào! สวัสดี! မင်္ဂလာပါ! ជំរាបសួរ! ສະບາຍດີ!

💚 Sustainability often conjures up images of lush green landscapes and activists promoting conservation to protect biodiversity. However, we must not neglect the importance of the financial feasibility to sustain a smooth transition from a high-emitting reality to a low one. Thus, environmental sustainability and economic sustainability must go hand-in-hand!

⚡This marks the final issue of our climate finance series and it’s aptly covering transition finance as we transition to our energy transition series, which will cover everything from solar to batteries to geothermal.

✌️ This issue is a bit of a unique one because rather than having an interview, we instead have a more in-depth piece with our brilliant Indonesian academic co-author this week: Aktsa Efendy, a tech entrepreneur & VC who is currently pursuing a Master’s in Finance at Cornell’s Dyson School with a focus on Climate Finance. For this piece, he also consulted Professor Aichiro Suryo Prabowo, a postdoctoral fellow in the Southeast Asia Program (SEAP) at Cornell whose research integrates sustainability and resilience issues into public finance and budgeting.

▶️ Without further ado, let’s transition to the main agenda…

🤔 What’s the deal with transition finance in Southeast Asia?

⚖️ As an emerging economy, Southeast Asia faces a constant balancing act between promoting economic growth and decarbonization, all while ensuring energy security in powering its development. 

🟢 The act proves to be a tall order, especially given how greening the economy would require having to eventually phase out close to ~80% of the region’s ‘brown’ energy sources—a substantial contributor of which—is coal. Presently, the region has approximately ~3.9 gigatons of carbon dioxide equivalent (GtCO₂e) emissions being contributed by the energy sector, ~40% of which comes from coal (CSIS, 2023).

⁉️ Three questions, then, become especially critical to address:

1. How much funding is required to transition our economy into clean energy?

2. How should we come about closing that funding gap?

3. What can we do to ensure an overall ‘just’ transition, promoting equitable growth without sacrificing energy security?

💰1. Funding required

🖼️ On the question of ‘how much’, we can refer to the carbon arbitrage framework, a quantitative analytical foundation authored by a trio of Professors from Stanford’s Institute for Economic Policy Research to measure the net gain of replacing coal with renewable energy:

🤑 According to estimates using the framework, sizing down from Southeast Asia’s coal consumption of ~200 million tonnes against the world’s total of ~8.3 billion tonnes (IEA, 2023) by 2030 in transitioning Southeast Asia’s energy sector from coal to renewable energy could yield a benefit of approximately USD 1.88 trillion. The present value of the cost to transition to renewables is comparatively only around USD 440 billion (link to workbook for detailed calculation & cited sources). Despite the substantial upfront costs, the long-term economic and environmental benefits of this transition are clear!

🕳️ 2. Closing the funding gap

💵 On the question of ‘how we should come about closing that funding gap’, it's clear that private capital alone will not be sufficient. While climate funding has grown substantially in recent years through instruments like green bonds, sustainability bonds, and other vehicles, more is needed to fully close the gap.

💸 In 2021, the issuance of green, social, sustainability and sustainability-linked bonds reached a record USD 1.1 trillion globally, up from less than USD 200 billion in 2018 (ICMA, 2019). Despite this growth, the IPCC estimates that climate finance flows need to increase by 3-6 times current levels to limit global warming to below 2°C (IPCC, 2023).

Private investors face challenges in allocating more capital to decarbonization and net-zero transition activities, especially in developing economies. Many climate-aligned assets provide risk-adjusted returns that fall short of private investors' expectations. Blended finance is increasingly seen as a key solution to mobilize both public and private capital to help bridge the climate funding gap.

🍲 Blended finance is the “melting pot” of funding; it strategically uses concessional capital from public or philanthropic sources to increase private investment in sustainable development. By employing mechanisms like first-loss capital, technical assistance, and guarantees, blended finance can enhance the risk-return profiles of sustainable investments to de-risk & attract more private capital.

🤏 However, in Asia, while blended finance approaches are gaining traction, volumes have been stagnant at around $2-3 billion annually in recent years, which is just a fraction of what’s needed (MAS, 2024).

3️⃣ ASEAN can demonstrate the potential for scaling up blended finance in Asia by focusing on three key enablers:

1. 💰 Mobilizing risk-tolerant capital

2. 🤝 Developing risk-centric partnership models

3. 🛠️ Expanding innovative risk mitigation tools

For instance, Indonesia's $20 billion & Vietnam’s $15.5 billion Just Energy Transition Partnership (JETP), Singapore's $5 billion Financing Asia's Transition Partnership (FAST-P), and $1.9 billion ASEAN’s Catalytic Green Finance Facility (ACGF) all aim to crowd-in private capital for transition and green projects by leveraging public and philanthropic funds, highlighting the critical role of blended finance in de-risking and catalyzing private investments in climate action.

Capital markets play a vital role in mobilizing funds for the energy transition but face challenges such as unclear taxonomies, inconsistent reporting standards, and the need for verifiable transition plans. Improving transparency by aligning with international frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) and the Task Force on Nature-related Financial Disclosures (TNFD) while strengthening regulations can enhance investor confidence and attract more capital flows. By addressing these challenges, capital markets can optimize the allocation of transition finance and support ambitious initiatives like the JETP, FAST-P, and ACGF.

⚖️ 3. Ensuring a just transition

In answering the question of "what can we do to ensure an overall 'just' transition, promoting equitable growth without sacrificing energy security," we must adhere to the core principles outlined by the United Nations Development Programme's (UNDP) alliance for a just energy transformation. These principles emphasize the importance of ensuring energy security, recognizing energy access as an essential contributor to development, and supporting workers and communities affected by the transition.

Paying homage to Stanford’s John Doerr, a triad of “S’s” can be a guiding principle for Southeast Asia to achieve such a just transition, which are:

•  💨 Speed in the short term

• 🚀 Scale in the medium term

• 🏛️ Sovereignty in the long term

Legend for charts above: Blue bar chart is the stated policies scenario, whereas the Yellow dot is the sustainable development scenario

 💨 In the short term, Southeast Asia can achieve Speed by deploying concessional capital to help de-risk and catalyze private investment in readily-available renewable energy technologies by drawing inspiration from the UK's Green Investment Bank, which catalyzed over £12 billion in clean energy investments between 2012-2017. This approach will help meet Southeast Asia's 3% annual energy growth consumption needs over the next decade while simultaneously reducing CO2_e emissions by around 2 Gts (see the two charts above).

🚀 In the medium term, Southeast Asia should aim to achieve Scale by deploying capital to support nascent renewable energy technologies—like green hydrogen—and phasing out coal, such as through projects like the Cirebon-1. The region can draw inspiration from the loan guarantees extended US Department of Energy's Loan Programs Office, which successfully commercialized innovative clean energy technologies such as utility-scale solar projects, as well as Greece’s work with the World Bank to phase out coal in Western Macedonia. This approach ensures a gradual phaseout of brown energy while recognizing energy access as an essential contributor to development, in line with the UNDP principle.

🏛️ In the long term, Southeast Asia can achieve Sovereignty in terms of both green energy sources and workforce by filing the approximately 100 million gap in new green jobs across the region (OECD, 2024). Prioritizing the re-skilling and re-absorption of Southeast Asian brown energy workers into the green workforce is crucial. Southeast Asia can draw inspiration from Germany's successful transition away from coal mining in the Ruhr region, where coal mining jobs fell from nearly 480,000 in 1955 to just 3,371 in 2018; through policies such as voluntary wage freezes, early retirement, worker relocation, re-training, and investments in transforming into a knowledge- and tourism-based economy, they ended up with 100,000 workers in green tech R&D by the mid-2000s (WRI, 2021).

🤝 By embracing innovative financing mechanisms, prioritizing a just transition, and fostering regional collaboration, Southeast Asia can emerge as a global leader in the fight against climate change, proving that sustainability and growth can go hand in hand.

🤿 We will be diving deeper into this third topic in a bit more detail—particularly from a policy perspective—in our next issue, which will feature an interview with Indonesia’s JETP team. So stay tuned 📻!

📚 Want to learn more about this topic?

1. “Indonesia’s green powerhouse promise: Ten bold moves” from McKinsey

2. “Addressing Financial and Investment Barriers to Accelerating ASEAN’s Clean Energy Transition” from ASEAN

3. “Southeast Asia’s Green Economy 2024 Report” from Bain, GenZero, Standard Chartered and Temasek

📢 Shout-out to Energy Shift Institute!

⚡️ The energy transition involves a multitude of actions, but it sometimes calls for fundamental rethinking of established norms. At Energy Shift Institute, we aim to bring context, credibility and clarity to some of the most critical questions in Asia's energy transition—questions that might be too sensitive for some to tackle or too technical for the climate movement to easily address. 

💡 We believe Southeast Asia needs more discussion on the "why" behind energy transition, not just the "how." That's why we provide insights to investors, policymakers and the public to cut through the confusion and help them navigate this changing landscape.

💭 To learn more, check out our website!

🗞️ Recent News & Other Voices

Learn how to become an “Intelligent Investor.”

Warren Buffett says great investors read 8 hours per day. What if you only have 5 minutes a day? Then, read Value Investor Daily.

Every week, it covers:

• Value stock ideas - today’s biggest value opportunities 📈

• Principles of investing - timeless lessons from top value investors 💰

• Investing resources - investor tools and hidden gems 🔎

You’ll save time and energy and become a smarter investor in just minutes daily–free! 👇

Subscribe now with one click.

⏭️ Next up, we’ll be discussing JETP in a bit more detail from a policy perspective.

❓ 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