Scaling up sustainable finance for the most vulnerable in a post-pandemic Asia

In response to COVID-19, richer ASEAN countries are creating broad-ranging stimulus packages which incorporate the Sustainable Development Goals (SDGs); meanwhile, poorer countries focus on containing acute health challenges, while trying to revive already struggling economies.

At a time when health and food security is a priority over climate concerns, pursuing sustainable and green investments poses a challenge for governments. What has become clear is that, if countries want to achieve significant inclusive and sustainable green impacts from stimulus spending, it is necessary to complement state resources and donor support with private sector funds.

Advancing sustainable finance

Some progress has been made in adopting green standards and incentivizing the green loan market, bond issuances and Environmental, Social and Governance (ESG) investments. Institutions in both development and public sector finance have demonstrated their ability and willingness to fund climate action; in 2019 green bonds and loans reached US$64billion, a figure equivalent to one-quarter of global issuance and an increase of 29% year-on-year.

Despite this progress, a much larger scale of green investments is required to support poor and marginalized communities, who often have limited financial knowledge and are most at risk from climate impacts. Many barriers exist to accessing capital market funds and overcoming them will require a more coordinated approach. Currently, there are significant  operational gaps among stakeholders, mainly due to differences in their founding principles, institutional restrictions and the financial “languages” spoken that are understandable only to select groups, such as bankers and institutional investors.

Coordinating approaches to finance

Regulators and policy-makers need leverage on private green capital in order to develop stimulus packages which stretch beyond immediate relief, allowing them to ensure they can support vulnerable communities’ resilience and sustainable growth in the medium and long term. For example, existing successful in-country schemes, such as Indonesia’s government-backed project guarantees, can be further extended to support the nascent financial models that emerge from them.

Formulating workable financial models is required to attract mainstream funds. Due to their often diverse and complex nature, the “solutions” devised by government do not always offer vulnerable communities a clear path to cash flows. This requires a wider stakeholder approach, with creative and blended integration of instruments.

International financial institutions are also in a position to provide critical input and must be incentivized to take the lead in allocating resources to long-term stakeholders engagements. Local initiatives, for example, can be complemented by regional schemes, such as the Asian Development Bank’s ASEAN Catalytic Green Finance Facility for sustainable infrastructure development, which reduces financing costs through diversification and liquidity benefits for investors.

Redefining mandates

While traditionally working to support governments, family donors and philanthropic organizations are also at the forefront of sustainable finance, supporting schemes through private sector funds. At the recent Asian Venture Philanthropy Network (AVPN) 2020 Virtual conference, many philanthropic organizations expressed interest in collaborating with private finance to catalyze such a systemic change.

Concessional risk capital directed towards the riskiest parts of a financial structure can unlock large flows of mainstream capital markets’ financing, as shown in the recently launched Southeast Asia Clean Energy Facility. This underscores the need for support mechanisms in order to allow the public sector to engage more with the private sector and capital markets or find intermediaries that can do so.

It is clear that stakeholders need to redefine mandates and seek new ways for organizations to work together. Unnecessary restrictions, such as geographical mandates, should be lifted, paving the way to regional schemes. In addition, openness is required to facilitate new investment ideas and return mechanisms, and it would also help change fiduciary duties to include environmental and social benefits.

Partnering for impact

While aiming to integrate inclusive sustainable finance in stimulus packages, we must focus on the desired and actual impacts, and in doing so ensure a gender equality and social equity approach. We need to venture beyond existing frameworks and tailor approaches for new emerging schemes, while adhering to existing international principles. Working with vulnerable communities brings about benefits across multiple SDGs, and institutional investors entering this area are keen to better understand these benefits, as well as the inherent risks that accompany them.

To meet these challenges, multi-stakeholder working groups must be created for pilot projects demonstrating promising results, until their paths to commercial viability and scale are achieved.

SEI’s sustainable finance initiatives in Asia aim to facilitate such dialogues, not only by incentivizing financial players’ participation and leadership and convening all stakeholders, but also through the provision of evidence-based solutions and the development of impact assessments frameworks. This work is done with an in-depth understanding of communities and the objective of simplifying the “languages” currently at play in these institutional environments.

By breaking free of existing silos and advancing a dialogue on financial systems in sustainable finance by promoting collaboration and understanding among stakeholders, we will be able to find innovative and workable financial models that can bring in the resources needed to support vulnerable communities for an inclusive, resilient and sustainable future.