Positioning for Southeast Asia's green transition

Southeast Asia, rich in natural resources and valuable natural biodiversity, plays a pivotal role in the world's net zero transition. However, it is also extremely vulnerable to global warming - Asia is home to 99 of the world's 100 most environmentally at-risk cities.

To combat such risks, many Southeast Asian governments have pledged ambitious carbon neutrality plans backed by massive stimulus to push for green and sustainable industries.

The Singapore Budget 2022 announcement has revealed how Singapore is moving decisively to take its Green Plan forward. The Singapore government is targeting to reach net-zero emissions by or around mid-century, and this will entail advancing our mandate to adopt lower-carbon renewable energy sources and increasing investments in low-carbon transition technologies.

Concrete steps include the issuance of S$35 billion of public sector green bonds by 2030 to help develop a robust green finance market and accelerating the adoption of electric vehicles (EVs).

To support the green transition, the government will provide an essential framework that financial institutions and businesses will eventually need to adhere to.

These commitments not only seek to address the immediate climate issues but have the potential to create more than US$1 trillion in annual economic opportunities by 2030, according to Bain.

For investors, this is a nascent opportunity and an emerging thematic trend. But knowing where governments and industry will focus efforts could build resilience into your portfolio and help your investments grow in tandem with the markets.

Here are some themes and market developments to look out for:

#1: Building sustainable smart cities

Southeast Asia is expecting a population surge of 90 million in the next decade, which will put more stress on existing infrastructure. Cities are a key contributor to climate change, being responsible for 75 per cent of carbon emissions, with transport and buildings being the largest emitters. Smart building solutions can unlock cost savings by adopting efficient energy usage.

However, to move the needle on climate change, the future of transport has to be electric, which is currently insignificant at under 1 per cent of market penetration globally. Indonesia has set an ambitious target for EVs to make up 20 per cent of the total number of domestic vehicles manufactured in the next 5 years.

Globally, EVs are expected to grow by 36 per cent annually to reach 245 million vehicles in 2030 - more than 30 times today's level. Southeast Asia is expected to see even bigger exponential expansion.

With such goals, there will be immense improvements in EV infrastructure. For example, Singapore is aiming to deploy 60,000 charging points and will require all newly-registered cars to be cleaner-energy models by 2030. Internal combustion engines will be phased out by 2040.

Bankability is a common barrier in financing these sustainable infrastructure projects, and private capital could help bridge this gap. For example, in September 2021, HSBC and Temasek jointly launched a US$150 million platform to catalyse the financing of marginally bankable infrastructure projects, with sights set on scaling up to US$1 billion worth of loans within 5 years.

#2: Transitioning to greener energy

Resource extraction and energy generation are still very much coal-reliant and inefficient in the region, and must be decarbonised in a sustainable manner. ASEAN has set a target to achieve a 23 per cent share for renewable energy in primary energy demand by 2025.

It is not realistic to suddenly replace fossil fuels with renewables. The transition to natural gas is one low-hanging fruit. The advancement of green hydrogen technology is another possible solution, but solar and wind have the potential to grow significantly due to substantial land mass for the region.

In Singapore, the government has committed to quadruple solar energy deployment by 2025 - including covering the rooftops of public housing blocks with solar panels. In another decade, the ambition is to deploy 5 times that of today - roughly 2 gigawatt-peak, and capable of powering over 350,000 households a year.

Singapore can also play a crucial role as a clean tech hub. It can act as a test bed of commercialisation for new green technologies - such as green hydrogen and battery storage capabilities - and scale these solutions in other markets.

#3: Securing sustainable food chains

Employing technology and localising production are key to feeding a growing and large urban population in a sustainable manner.

Singapore can increase its local food production and yield through vertical farms, sustainable aquaculture and in the development of alternative, plant-based protein. For the latter, Singapore can be the launchpad for plant-protein research and even become a plant-protein production hub for the region.

#4: Reconfiguring to more efficient supply chains

Southeast Asia's manufacturing hub is a viable alternative to China - and supply chains can be reconfigured sustainably. As supply chains shift to this region, more robotics and automation will be employed to improve productivity and energy efficiency.

Furthermore, the implementation of the Regional Comprehensive Economic Partnership (RCEP) will allow a standardisation of cross-border regulations. This will promote trade efficiencies, streamline logistics and eventually reduce carbon emissions.

Capturing Southeast Asia's green transition

Southeast Asia's green transition should not be ignored by investors.

The investment case for Southeast Asia's green opportunities will evolve from a small set of pure play renewable and clean tech companies to a broader set of opportunities across the whole economy. All companies across all sectors will be affected by climate change and pressured by their shareholders to have net-zero policies and an action plan in place.

There is a need for investors to be aware of these trends and avoid companies that fail to adapt to these changes. Investors can gain exposure to Southeast Asia's green opportunities either through global companies with strong ESG scores that are adapting to these trends, or pure-play companies that are pushing the boundaries of green innovation.

As the demand for and performance of sustainability-related products grow, banks will play a crucial role in widening ESG solutions to spur green growth, and in providing the capital essential to channelling investments in this space, which in turn will help in the net-zero transition.

Southeast Asia's transition into a green economy is gaining traction, and knowing what lies ahead will help you capture a once-in-a-lifetime value creation opportunity.

Management and a member of the Regional Investment Committee in Asia.

In his role, he spearheads the development of investment strategies across all asset classes for private banking and wealth management clients in Southeast Asia. With his knowledge and wealth of experience, his investment views are frequently sought after.

You can connect with him on LinkedIn.