Climate Finance for Urban Climate Technologies in Southeast Asia

20 Dec 2023
Authors: Peter du Pont and Nancy Nguyen
Authoring Organisation: The Private Financing Advisory Network
Posted At: 12-2023

This blog is written by Peter du Pont and Nancy Nguyen, Asia Clean Energy Partners

The UN’s Climate Technology Progress Report 2023 was just released earlier this month.  It has a very apt subtitle: “Speed and Scale for Urban Systems Transformation”.[i]  The two of us co-authored a chapter in the report on financing clean energy and climate technologies in urban settings. While our chapter covers Asia and the Pacific broadly, there is a significant focus on financing innovative energy transition technologies and business models in Southeast Asia.

How much investment is needed?

Developing Asian countries require about USD 1.7 trillion annually in infrastructure investments until 2030 to maintain growth, enhance services, and build climate resilience. This amount far exceeds the current investment levels. From 2009 to 2019, foreign direct investment (FDI) inflows into Asia and the Pacific grew from about USD 350 billion to just under USD 600 billion annually. Yet Infrastructure investment initiatives related to urban development in 2020 were just USD 260 billion.

What are the key challenges?

In our chapter, we examine the challenges faced by project developers and investors in sustainable urban technologies and infrastructure. We cover aspects like urban design, e-mobility, energy efficiency, and waste management, emphasizing the need for increased investment in sustainable urban initiatives.

Financing challenges. Project developers and investors in sustainable urban development face a complex array of challenges. These include:

- limited access to finance, especially for early-stage projects and SMEs;

- a mismatch between project developers and investors, with gaps in investment standards and familiarity with climate technologies;

- multiple risk factors including market and regulatory risks;

- high upfront costs and long payback periods deterring investors seeking quick returns;

- complex, fragmented urban systems requiring coordinated funding;

- policy and regulatory uncertainty;

- revenue generation issues in public-private partnerships; and

- behavioral challenges in encouraging sustainable practices.

Financial instruments. The financial instruments developed to finance clean energy and climate technologies are diverse and innovative. They are designed to bridge the investment gap, improve risk management, and provide equitable valuation. Some of the most common instruments include public-private partnerships, project finance, blended finance, bundling, green/climate bonds, gender lens investment, crowdfunding, carbon finance, and innovation funds.

- Bundling, for instance, aggregates assets to attract investors by reducing costs and mitigating risks.

- Green bonds are used to finance sustainable infrastructure projects, while impact funds focus on creating social/environmental benefits while generating financial returns.

- Electric mobility, cooling and cold chain, Internet-of-Things (IoT), integrated logistics, and water management are sectors utilizing these instruments, each with unique challenges and potential.

- Gender lens investment and circular economy principles are also being applied to unlock new opportunities and drive sustainable urban development.

In our chapter, we present case studies across eight sectors. Several of the case studies focused on home-grown Southeast Asia businesses:

1. E-Mobility: Selex Motors is a Vietnamese company that leverages data insights and cutting-edge technologies such as IoT, artificial intelligence (AI) and big data in its development of electric motorcycles.

2. Green Buildings: Thailand’s National Housing Authority (NHA), with assistance from the Asian Development Bank, issued its first social bond in 2020 and subsequently issued a sustainability bond in 2021, based on the certification of a substantial share of the asset pool being certified as green buildings.

3. Urban Cooling Solutions: PAC Corporation is a woman-led company based in Bangkok that specializes in creating innovative energy-saving cooling and heating products. And the e-mobility company Selex provides a cold box that can be attached to Selex’s electric motorbikes used for food delivery.

4. Water Management: Sustainable water management includes technologies for rainwater harvesting, grey water reuse, reducing leakage and losses in and irrigation systems, with the aim to reduce water waste and ensure water availability. In Cambodia, TapEffect plans to launch at least 10 piped water systems during the next two years, with an ambition to expand to at least 180 systems by 2030.

5. Integrated Development and Logistics: World Bridge Industrial Developments in Cambodia provides resilient, eco-friendly industrial & commercial infrastructure at affordable rates along with access to state-of-the-art digital IoT, R&D and logistics services. While the opportunity for smart logistics platforms and services provides SMEs with several key advantages, the higher cost and complexity can be challenging for many SMEs to accept and adopt.

Each case study illustrates the application of climate technologies in urban environments, showcasing regional innovation and adaptation. For detailed insights, we recommend reading the full chapter.

Summary and Conclusions

Based on an observation and interpretation of the case studies described in the chapter, we draw the following broad conclusions:

- Rapid growth in clean energy and climate financing. Asia’s cities are growing rapidly, and financing is being deployed to support a range of innovative and entrepreneurial solutions.  Investment into new business models is driving the transition to decarbonization and smart infrastructure, led by sectors such as e-mobility energy efficiency, cooling, green buildings, the IoT and the circular economy.

- Importance of a holistic framework for financing smart city development. While there are clear benefits to a top-down, holistic planning approach for smart city investment and development, financing often remains hostage to a bottom-up, project-by-project approach, in which the importance of the individual business model and risk assessment are the main factors determining financing structure and outcomes. Raising finance for smart city initiatives and urban developments is not fundamentally different.

- There is a wide variety of financial instruments. Financing flows for urban infrastructure are hampered by a business-as-usual mindset. It is critical for entrepreneurs, investors, civil society and city officials to embrace a new paradigm for urban infrastructure investment. Fortunately, there are a number of approaches—namely aggregation, green and climate bonds, impact and innovation funds (deploying blended finance) and gender lens investment—that are breaking down barriers and channelling funding to where it is needed most and where it has the most impact.

- Need for collaborative approaches and improved coordination. These new investment approaches require increased coordination and decision-making, both horizontally (among various stakeholders and across different departments and different functional areas) and vertically (at national, regional and municipal levels). This leads to increased complexity and overhead costs for investors, which are not easy to allocate, but ultimately results in better overall economic outcomes and an increase in social and economic returns.

- Importance of pipeline development. Project preparation and transaction management are critical support services for structuring deals and channelling finance flows, including but not limited to SMEs in the private sector. Project development and preparation facilities have an important role to play in originating, developing and curating investor-ready pipelines and pushing the investor envelop. Such facilities help investors to understand and relate to urban development in the climate context, by socializing new business models and by managing and pricing real and perceived risks.

In summary, despite the significant challenges in mobilizing financing for sustainable urban development, significant progress is being made, and it is positive to see the wealth of innovation available, especially among SMEs, which can be tapped by stakeholders to accelerate the transition to smart cities across Southeast Asia, and across Asia and the Pacific more broadly.

 

Peter du Pont is Co-Founder and Co-CEO of Asia Clean Energy Partners. Nancy Nguyen is Director of Consulting for Asia Clean Energy Partners. Together, they lead the Regional Coordination Team for the Private Financing Advisory Network (PFAN) in Southeast Asia.

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[i] The UN’s annual Climate Technology Progress Report focuses on developing and transferring technology to amplify and accelerate climate action. It serves as a practical tool for national stakeholders, and as an input to international processes such as the UNFCCC's Global Stocktake. The report, prepared by an international team of 33 scientists, is a collaboration between UNEP Copenhagen Climate Centre and the UNFCCC Technology Mechanism.