Action needed to bridge $800bn Asian climate finance gap

Singapore regulator calls for renewed social and political effort

Asian governments, regulators and businesses need to sustain collective commitment and action, strengthen climate disclosures and support the de-risking and viability of transition financing to fully play their regional role in the global effort to reach net zero, according to Chia Der Jiun, managing director of the Monetary Authority of Singapore (MAS).

In his opening speech to the second edition of the recent Financing Asia’s Transition (FAST) Conference 2024, organised with Temasek and BlackRock, Chia Der Jiun pointed out that the Asia-Pacific region accounts for half of global emissions and, even excluding China, 19% of emissions.

“This share will grow in the coming years. It will be in Asia where global actions in climate mitigation will ultimately succeed or fail,” he said.

Chia Der Jiun said that more collective action is needed to rise to this significant challenge.

He pointed out that at COP28 last year there were “noteworthy” achievements, including the operationalisation of the loss and damage fund, and the mobilisation of more than $83bn for climate action.

But Chia Der Jiun said that this is not enough. “While there has been continued global commitment to collective action, more momentum is needed. National climate action plans remain insufficient to limit global temperature rise to 1.5 degrees Celsius, or even to below 2 degrees Celsius,” he said.

He pointed out that governments and policymakers are facing slower economic growth, still-elevated inflation and limited fiscal headroom amidst high levels of debt.

At the same time, financial institutions and businesses face rising costs in complying with regulatory and disclosure requirements, adjusting to carbon pricing policies, implementing their transition plans and building resilience into their supply chains.

“Social and political support for national climate action and international coordination will continue to be a contested arena. As the costs of both climate change and the transition become more apparent, contention will grow between groups who view national and global efforts as insufficient, and those who think it is already too much,” said Chia Der Jiun.

In January this year, the IMF estimated that the annual shortfall to meet climate mitigation and adaptation needs in emerging and developing Asia is at least $800bn, said Chia Der Jiun.

He said that regional authorities need to sustain popular understanding and support for climate action.

“Communicating the urgent need for action and demonstrating our collective resolve remain important planks for sustaining this support. We have to continue to do that and more. But there is an increasingly important second plank: of assuring the workforce and the public that as companies, sectors, and economies transition, and as jobs transform, there will be help given to manage this change and to benefit from it,” he said.

Jobs in many sectors will see some transformation and new green jobs will be created, said Chia Der Jiun.

In Asia Pacific, the International Labour Organisation (ILO) puts the potential opportunity at 14.2 million net green jobs by 2030.

But Chia Der Jiun said that skills training and supporting policies will need to be in place so that this opportunity can be realised. “For the financial sector too, we need to prepare a professional workforce that has the skills to provide the needed financing support to the region’s transition,” he said.

The MAS recently announced its Sustainable Finance Jobs Transformation Map (JTM) in partnership with the Institute of Banking and Finance Singapore, and supported by Workforce Singapore.

“The JTM assesses the impact of sustainable finance on jobs in Singapore’s financial services sector. It identifies the new skills needed in existing job roles as well as the new job roles that will be created. Most importantly, the JTM enables the needed training to be designed and delivered,” said Chia Der Jiun.

Strengthening disclosures is another cornerstone of the net-zero effort, said the MAS managing director.

“To sustain commitment and the momentum of action, we need to sharpen accountability of all our actions, across both the public and private sectors, to shareholders, stakeholders and the public. Data and disclosures are key to this accountability,” he said.

“As we consider the need to sustain collective action, the quality and comparability of disclosures are important elements. The development of sustainability disclosure standards began with important frameworks such as the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures,” added Chia Der Jiun.

The third major effort is to bridge the financing gap through supporting the de-risking and viability of transition financing, according to the MAS managing director.

He said that according to the IMF, the private sector will need to supply up to 90% of the $2trn needed annually by emerging market and developing economies to reach net zero by 2050.

However, in Asia, many transition projects are still unviable for commercial capital due to political, currency and credit risk, pointed out Chia Der Jiun.

“Bridging the financing gap will require both market solutions and a supportive policy environment. We need to de-risk projects for investors and lenders, and also find ways to realise the value of environmental benefits to improve the commercial viability of projects,” he said.

Multilateral Development Banks have a critical role to play in de-risking projects, pointed out the MAS CEO. The World Bank, for example, recently announced a streamlining of its guarantee solutions to a simple “menu of options” to allow improved access and faster execution.

These changes will start from 1 July 2024, with a goal of tripling the World Bank Group’s guarantee business to $20bn by 2030, pointed out Chia Der Jiun.

Public-private partnerships in the form of flexible concessional capital in blended finance platforms will be a primary vehicle to de-risk projects and improve viability for commercial capital to come in at scale, he added.

Chia Der Jiun said that in Singapore there is an effort to raise $5bn together with international partners for a blended finance initiative focused on this region – the Financing Asia’s Transition Partnership (FAST-P).

He added, however, that more can be done to channel financing credibly and effectively to the region’s transition needs, specifically through regional “sectoral pathways”.

“Many financial institutions today reference global pathways, such as the International Energy Agency’s (IEA) Net Zero Emissions Pathway, to set their net-zero targets and develop their transition plans. We cannot expect every region’s pathway to be the same. A set of credible transition pathways contextualised to Asia’s needs will have to take into account that this region’s energy demand is still growing in the near term,” he explained.

“Regional sectoral pathways will enable financial institutions to better steward their clients and support the region’s transition. MAS is thus working with credible pathway modellers like the IEA to explore the development of such region-contextualised sectoral pathways for Asia,” continued Chia Der Jiun.

Another goal is to capture the value from environmental benefits to improve the commercial viability of financing transition projects, he said.

In this case, the MAS aims to establish high-quality trusted transition credits that require market solutions and supportive policies.

MAS identified the early retirement of coal-fired plants as a challenging use case that required intervention to be “bankable” said Chia Der Jiun. For this reason, MAS launched the Transition Credits Coalition, or TRACTION, to bring together 30 partners to enhance the economic viability of retiring coal plants early with transition credits.

He explained that TRACTION is looking into three areas that are key to scaling transition credits.

First, enabling a supply of high-integrity transition credits. This is a new type of carbon credit where methodologies are still under development. As there is currently no unified framework for assessing the quality of transition credits, Chia Der Jiun said that MAS wants to bring greater clarity to market participants about the characteristics that high-integrity transition credits should have.

Second, a toolkit of solutions needs to be developed to enhance the replicability of transition credit transactions.

TRACTION will thus look to develop a playbook that can help coal plant owners, project developers and financiers to use transition credits, he said.

Third, there is a need to build investor confidence in transition credits, said Chia Der Jiun.

“For transition credits to be commercially viable, they will need to meet the expectations of credits off-takers. Close engagements with investors in both voluntary and compliance markets will help the design of credits to better meet these expectations,” he said.

In parallel, work has begun on two pilot projects to apply transition credits in coal phase-out transactions.

Based on early estimates, the transition credits could help bring forward the retirement of two coal plants by at least five years, translating to a reduction of more than three million tonnes of carbon emissions per year. “By way of comparison, this would be twice the emissions savings achieved if all light vehicles in Singapore were converted to electric vehicles,” he said.

To conclude, Chia Der Jiun said: “To bridge global climate ambition to regional action and impact, we need to ensure that the challenges of growing contention and rising costs do not erode our collective commitment to action. There is no alternative to strengthening the momentum of action through multilateral agreements, industry coalitions and national and corporate net-zero plans.

“We still have much to do ahead of us if we are to bridge Global Ambitions to Finance Asia’s Transition. We have to sustain collective commitment and action, strengthen climate disclosures and accountability, and support the de-risking and viability of transition financing.”

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