The Fund, to be launched at the ASEAN leaders’ summit in November, will focus on filling the region’s USD2.8 trillion infrastructure gaps over time, whilst providing more immediate stimulus to the region’s struggling economies affected by COVID-19.
As the Fund gets designed, there is a perfect opportunity to link its project selection and risk assessment framework to the region’s climate change agenda and its UN Sustainable Development Goal commitments.
Doing so will catalyse the flow of much-needed institutional investment to plug government spending gaps, build future economic resilience against natural disasters (including rising seas levels), and help the region move away from high-emission development pathways.
There are several steps for how infrastructure development could be more strongly linked to sustainable development. Some can be adapted now and others will take time. Here are three:
Develop a common language around what sustainable infrastructure projects look like
ASEAN member states need to agree on common definitions for what are considered ‘green’ or ‘sustainable’ activities and investment practices. A way this can be more readily achieved is to try to localise green standards or ‘taxonomies’ that have already been implemented in other jurisdictions, like Europe, rather than build its own1. In fact, the EU – in its recovery budget plan announced at the end of May – said that ‘green’ will be a guiding focus and that its EU taxonomy will play a role2. Again, ASEAN nations could agree to adopt these taxonomies now and refine them over time.
HSBC has also been working with the IFC and the OECD to mobilise infrastructure investment through our Finance to Accelerate the Sustainable Transition-Infrastructure (FAST-Infra) initiative. This aims to develop a consistent labelling system for sustainable infrastructure investment3.
Integrate ESG as part of the risk assessment and evaluation
Institutional investors are keen to invest in sustainable infrastructure, which can offer stable, long-term returns; however, large-scale infrastructure projects in ASEAN often involve a variety of environmental, social and governance (ESG) risks that prevent private sector investment.
So linked to the formulation of green and sustainable definitions is how these activities are assessed for risk. These include risks related to the design and construction phases of a project, post-construction payment and the policy environment. Project participants – including banks, projects developers, investors and governments – need to have a common understanding and process for how to assess ESG risks.
Both the International Finance Corporation’s (IFC) Environmental and Social Performance Standards and the Asian Development Bank (ADB) Safeguard Policy Statement are the most commonly referenced international standards by financial institutions today and serve as a good starting point. They can be adopted now by ASEAN governments.
Develop financing solutions for sustainable infrastructure development
Whilst project participants can bring ESG risks within range of investor appetite, it may not be enough to get them over the line for the investment to happen. A way to overcome this challenge is to adopt a blended finance approach where these risks are shared between the private and public sectors. By reducing the risk profile of sustainable infrastructure projects, blended finance can allow investors to participate in financing projects they would not otherwise be able to do so. While some infrastructure projects in ASEAN have already benefitted from the use of these instruments, further work to standardise the approach is needed.
Adopting recommendations of this scale and in this timeframe will be no small feat, which is why taking an iterative and pragmatic approach is ideal.
There is also scope for Singapore to take a leadership role given its existing financial hub status and focus on building out its sustainable finance credentials. This can involve coordinating and influencing the member states on which United Nations Sustainable Goals (water, energy etc) to prioritise; setting up a sustainable infrastructure pipeline for prospective investors to select from; and establishing standardised ESG risk management frameworks across its financial institutions (which is currently in train).
Applying sustainable development goals to the ASEAN Pandemic Recovery Fund makes complete sense for the region. It will help bridge the gap between the investment needs and government budgets by attracting private investment across banks and institutional investors; it will help ASEAN markets who are vulnerable to climate-related natural disasters like flooding build preventative infrastructure and, therefore, economic reliance; and it will help nations meet their Paris Accord and other UN Sustainable Development goals.
As always, success will be in the detail, but the first step should be ASEAN member states agreeing that the Pandemic Recovery Fund is linked to sustainable development.
A contribution piece by Tony Cripps, CEO HSBC Singapore. A version of this piece was first published in The Business Times on 2nd October 2020.