Singapore – June 7, 2022 – 2022 marks an inflection point for climate change in Southeast Asia (SEA) as the region works to translate climate commitments to tangible action. The past years have witnessed parallel momentum across both public and private sectors with many new bright spots – COP26 has accelerated climate action at national governmental level, along with corporates, investors and consumers advocating in the same direction. While the progress is heartening, clear transition pathways are yet to be seen. Research from a new report by Bain & Company and Temasek, with contributions from Microsoft, ‘Southeast Asia’s Green Economy 2022: Investing behind new realities’ has shown that stakeholders must overcome gaps in investment and emission reduction while balancing attention on energy and food security and widespread inflationary concerns. In the decade ahead, it is both crucial and pragmatic to focus on directing investment flows to drive the most tangible impact and deliver carbon savings sooner versus in the longer-term future.

Moving from promises to action: A year of new challenges

Released today at Ecosperity Week, Temasek’s annual sustainability event, the latest annual report on the SEA green economy notes how COP26 has raised the region’s climate ambition with eight out of ten countries now having net zero target and two new countries, Singapore and Indonesia, piloting carbon taxes. Green investment has picked up: $15 billion in cumulative investments were deployed since 2020, with the majority going to Renewables and Built Environment. Entrepreneurial energy is also growing with focus on building and scaling sustainable solutions, especially in the energy and agri-food space, combined with exponential growth (3x) in Private Equity (PE)/Venture Capital (VC) sustainability investments between 2020 and 2021. Finally, consumers are ready to act – 90% are willing to pay more for products which have a positive environmental impact.

Yet, this recent progress has not overcome the existing emission reduction and investment gap. Despite bolder new ambitions, most SEA countries need more concrete roadmaps as well as incentives and climate financing plans. A large emission gap of 2.6-3.2 Gt exists versus 2030 targets after accounting for marginal improvements in emission levels based on latest Nationally Determined Contributions (NDCs) and planned policies projections. Current investment levels are at less than $20 billion, which falls short of the estimated $1-3 trillion required to close the emissions gap. Evolving macro challenges lie ahead for national governments, as they grapple with competing priorities including energy security amid the Ukraine conflict, Covid-19 recovery and inflationary pressures.

“SEA needs to move from promises to action and bridging the gap between opportunities and results will be a key milestone. We remain bullish on the $1 trillion economic opportunities in SEA, but we need to step up as a region to strengthen the investable market and increase green capital flows,” said Dale Hardcastle, Partner and Director of the Global Sustainability Innovation Center (GSIC) at Bain & Company. “To capture these opportunities, businesses must lead with innovative breakthroughs and collaborations across stakeholders, and regulatory and market players need to focus transition efforts on deployment of ready solutions. While there is no silver bullet to this climate puzzle, proven technologies with positive investment returns will impact small business owners and farmers at the foundation of the economy to enable sustainable transition.”

Identifying today’s investable opportunities

The report assesses the region’s decarbonization themes by carbon abatement potential and investment attractiveness, based on interviews with investors and topic experts, sector screening and deep dives of priority sectors. More than $15 billion in cumulative sustainability investments have flowed into the region since 2020, with 45% deployed in the last three quarters. Of all investor types, corporate investors have been the main engine driving 70% ($11 billion) of total investment. The strong uptick in capital flow signifies that regional investors remain optimistic about the investment potential in SEA green economy, although the investment scale of sustainable projects remains a key concern.

Diving deeper, the potential investment for tangible returns and climate impact is closely linked to three sectors: energy, nature, and agriculture which capture 90% of SEA’s carbon budget. Collectively, five priority levers offer concrete investible opportunities today that will drive 60% of SEA’s carbon abatement potential: Forest Conservation, Renewables (Solar and Wind), Electric Mobility, Sustainable Farming and Built Environment.

1. Forest Conservation is a growing investible space in Southeast Asia, and particularly in Indonesia and Malaysia; it is the largest carbon abatement lever in region and will represent a $20 billion opportunity by 2030.
2. Renewables (Solar & Wind) represents a $30 billion opportunity by 2030, of which Solar represents $20 billion. Corporate investment in renewable energy solutions is accelerating in the region and accounted for at least $6.6 billion in corporate green investment since 2020.
3. E-mobility looks poised to take off in Indonesia, Thailand, and Vietnam, especially for 2-wheeler EV manufacturing and sales due to strong automotive manufacturing expertise in these markets.
4. Sustainable farming: Precision agriculture and farmer service platforms present large potential opportunity to drive yield improvements and reduce emissions. Malaysia, Thailand and Vietnam are most attractive due to infrastructure readiness and strong regulatory support.
5. Built environment: Significant opportunity in energy-saving cooling technology and green building products in construction. The most attractive opportunity can be found in efficient cooling solutions, with large potential for green building materials and products.

“With its vibrant and dynamic digital-fuelled economy, Southeast Asia has tremendous potential to make long term, meaningful impact in the global green transition,” said Dr Steve Howard, Chief Sustainability Officer of Temasek. “The opportunities are immense, but it will take collective will, unprecedented collaboration and meaningful financing to unlock the full potential of decarbonization levers across all green investment asset classes.”

“The Green Economy and the data we’re seeing from this research by Bain and Temasek shows that businesses, governments, and society need to work together to tackle the scope, scale, and speed of the world’s environmental challenges. It is both a sprint and a marathon. Microsoft is committed to innovation and technology driven solutions that address decarbonization and sustainable development. From product design, services, and devices to our cloud and AI offerings that help businesses cut energy consumption and reduce carbon footprints. Singapore is an amazing blueprint globally in thinking about how to ensure we have sustainability across every part of government, and we look forward to supporting leaders in the region to scale sustainable innovation and acceleration,” said Lorena Paglia, Regional Leader, Sustainability & Customer Experience at Microsoft.  

Three disconnects impede greater investment and climate action for SEA: Lack of incentives for needle moving decarbonization levers to scale quickly, insufficient focus on proven low-risk solutions, and lack of clarity on system costs for energy transition. To bridge the gap and accelerate green investment, there are four critical actions to take:

1. Unlock opportunities in proven solutions: Adopt a more holistic decarbonization program with stronger framework and incentives to expand market access and enroll segments such as SMEs.
2. Confront system costs for energy transition: Clarify full costs on renewables power transition and define funding sources and mechanisms to attract new investments
3. Strengthen green financing: Leverage financial services sector to develop abatement investment products that lower the cost of capital for businesses to transition
4. Drive greater regional collaboration: Scale up regional collaboration to unlock new potential and risk mitigation. Foster partnerships across value chain, industries, and public/private sectors.

Editor’s note: To arrange a copy of the report or an interview with the authors, please contact Nicholas Worley at nicholas.worley@bain.com or +852 2978 8830.