Asian Energy Investment Key to Closing “Carbon Cost” Gap

Investment in energy infrastructure in Asia is vital to deliver low carbon transition across the region and bring its global carbon cost of GDP in line with the global average.

Major investment in renewable energy infrastructure projects across Asia is required to accelerate the net zero transition and tackle climate change, particularly in emerging economies, where energy policy is at least as stable as Western economies, according to Nick Parsons, Head of Research at impact investment firm ThomasLloyd. 

Asia produces more than half the world’s CO2 emissions, with investment in renewable energy infrastructure in the region vital to delivering on the clean energy transition and meeting net zero targets, according to a recent whitepaper from Thomas Lloyd. 

Despite rapid global emissions growth, the carbon intensity of energy production and consumption has fallen significantly over the past 40 years, with the latest figures for 2021 showing a global average carbon cost of GDP per country of 382 million tonnes (Mt) per trillion – representing a 78% reduction from 1980, the report noted. The concept of carbon cost of GDP measures the amount of CO2 emitted for every trillion dollars of GDP generated. 

“We’ve been changing our energy mix, we’ve been making our economies less energy dependent, we’ve had enormous technological advances, and we’ve gained environmental awareness,” Parsons told ESG Investor. “Basically, we’re trying to use less and less energy to create the economic growth that’s needed for prosperity, and poverty reduction.” 

However, the carbon cost of GDP among Asian countries remains significantly higher than the global average, he noted, adding that while Western populations are in decline, they are rising rapidly, coinciding with the region’s rapid economic growth which now accounts for more than half of global GDP.  

ThomasLloyd’s report found that the carbon cost of GDP per country for Asian emerging economies, such as Indonesia, the Philippines and Bangladesh, ranks for the most part notably above 500 Mt levels, in sharp contrast with Europe’s ‘Big Four’ (France, Germany, Italy and the UK) with 132 Mt. 

“Asia is having its own industrial revolution now, while [Western economies] had theirs in the 1850s, along with all the environmental degradation that came with it,” he said. “It would be wrong? unfair? to now lecture Asia on why it can’t have its own industrial revolution.”  

The challenge, he noted, is that against the backdrop of a rising population and economic growth Asia is also rapidly increasing both its carbon intensity and CO2 emissions. The response is a “global partnership” with the region to deliver the technology and capital its needs to mitigate its impact on climate and nature.  

ThomasLloyd does not invest in China, largely as the scale of its economy – close to US$20 trillion – means the average size of energy infrastructure investments do not meet the impact investor’s additionality threshold – meaning that the net greenhouse (GHG) emissions savings or sequestration benefits are not high enough to warrant investment. It is also challenging to measure impact in China due to governance issues, Parsons said. 

The firm has invested in several biomass energy plants, each one adjacent to an existing solar plant, on the island of Negros in the Philippines, with local development partner Bronzeoak Philippines.  

“These projects are a practical example of how we can work with Asian economies for not just a local benefit, but a global benefit to reduce carbon emissions and drive the energy transition,” said Parsons. 

“Fear of the unknown” 

When asked about the challenges investors face in investing in the energy transition in Asia, Parsons admitted that a major hurdle to overcome is the “fear of the unknown”.  

However, the regulatory framework in Asia is “remarkably” stable, particularly in the Philippines, where energy policy has remained constant and welcoming to foreign direct investment, he said.  

Despite the focus on ESG factors within southeast Asia still in its nascent stages, a new report by Sustainable Firth noted that in recent years ESG issues have gained priority, with a marked increase in awareness and adoption of ESG-related policies and metrics across the region. 

The report noted that southeast Asian countries are starting to place decarbonisation higher on the agenda, placing a priority on transition plans to decarbonise various industries within their economies.  

The 10 member countries of the Association of Southeast Asian Nations (ASEAN) are also paying greater attention to building renewable energy sources, although climate action has been hampered by fossil-fuel growth, especially in coal, the report added. 

Further, the report noted that sustainability reporting has gained momentum in the region, with stock exchanges and market regulators implementing various frameworks and guidelines to aid publicly traded companies and SMEs to report on ESG metrics and strategy.  

The Singapore Exchange has jointly launched an ESG data disclosure platform with the Monetary Authority of Singapore. The portal – dubbed ESGenome – helps companies comply with sustainability reporting requirements while providing investors with a reliable source of comparable data. 

“Arguably, the regulatory framework in much of Asia is more stable than Western Europe,” he said. “Tell me what the UK’s green energy policies are? Tell me what you think it might be next year or next week?” 

The ThomasLloyd Energy Impact Trust is the first ever dedicated offering on the London Stock Exchange providing direct access to sustainable energy infrastructure in emerging economies in Asia in areas including renewable power generation, transmission infrastructure, energy storage and sustainable fuel production.  

“[The trust] allows us to access institutional capital, which might not otherwise have flown into this space,” said Parsons. “It turns unlisted assets into a listed asset.”  

According to Parsons, it will take four decades for Asia to close the carbon cost of GDP gap on Western economies. “Just because it is a long-term project doesn’t mean we shouldn’t start today.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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