GFANZ is smoothing the way for patient capital, which is critical to Indonesia and Vietnam’s climate transition efforts.
Project size is one of several barriers to private investment in net zero transitions across the Global South that the Glasgow Financial Alliance for Net Zero (GFANZ) is seeking to dismantle through its involvement in Just Energy Transition Partnerships (JETPs).
Alice Carr, GFANZ’s Head of Public Policy and JETPs, said a strong pipeline of financeable projects will be key to the success of existing and future JETPs.
“At COP26, we [GFANZ] said we thought a new approach was needed to ensure that emerging markets and lower income countries looking to deliver on ambitious climate commitments have the necessary support to do that through a ‘country platform’ approach,” she told ESG Investor.
“One of the biggest benefits of JETPs is that it allows governments to convene [state and non-state actors], domestically and internationally, around common goals put forward in a common plan that is developed in a more coordinated way, meaning it stands a better chance of being achieved.”
GFANZ, which has more than 650 financial institution and provider members across its alliances committed to transitioning to net zero, has pledged to at least match public sector financing commitments made through JETPs with Indonesia and Vietnam.
To be able to fulfil this commitment, barriers to private finance in each country need to be identified and resolved, Carr said. The umbrella body and its members are in the process of working with international and domestic public sector bodies to design a systems-level approach which allows for the ramp-up of renewables supply, the management of coal-phase-out, and the delivery of needed investment in grid management.
“Committed firms engage with this challenge through a working group that we run,” Carr said.
GFANZ established initial working groups in 2022 for both Indonesia and Vietnam – including Bank of America, Citi and Deutsche Bank – which have been tasked with getting familiar with the priorities of the government in question to understand the challenges and trade-offs needed to deliver specific types of low-carbon projects.
The working groups provide feedback on what’s holding back financing, “and what policies or processes could change to make the projects more bankable and easier to finance”, said Carr.
“We’re trying to flag these challenges proactively so as to problem-solve at an earlier stage in the process.”
GFANZ members’ support of the Indonesian and Vietnamese JETPs “is contingent on the JETP plans being ambitious and there being a pipeline of investable projects to match that ambition”, she said, adding that “it is also contingent on public financing being used catalytically to crowd in private finance”.
According to GFANZ’s latest newsletter, in recent months the GFANZ JETP team travelled to Indonesia to support the Indonesian JETP Secretariat and wider stakeholders with the completion of the country’s second draft of its JETP Investment Plan, which was submitted to funding governments on 16 August.
The GFANZ JETP team also drafted a concept note on financing the Vietnamese JETP and other more technology-focused concept notes, all of which will feed into the country’s Resource Mobilisation Plan.
Building the pipeline
One of the main issues identified by GFANZ members, who include asset owners and managers, banks and insurance firms, is the size of project pipelines in Indonesia and Vietnam.
When there are fewer projects, they can be more hotly contested by both public and private finance.
A much larger pipeline of projects is therefore needed to secure the volume of private finance necessary to facilitate the transition, with public finance focusing on both improving the scale of these projects and addressing thornier challenges, like managing carbon phase-out.
Carr said a wide set of GFANZ members are being encouraged to engage with JETP-aligned projects that get tendered now, “while we also consider new financing structures and processes that could unlock more private finance”.
The first wave of financing from GFANZ will come from banks and venture capital to get projects off the ground, she said. GFANZ then plans to “build out solutions that allow for the recycling of that financing”, bringing in a wider set of investors to provide the necessary “patient capital”, such as pension funds, which have far longer time horizons.
“We’re still very early in the process, and we’re working on getting the first part of the chain moving, but we are very aware that we are going to need more patient capital.”
In June, GFANZ’s APAC Network launched a consultation on voluntary guidance for financing the early retirement of coal-fired power plants in Asia-Pacific as part of a just net zero transition, building on emerging frameworks for the managed phaseout of coal-fired power plants, including GFANZ’s Managed Phaseout of High-Emitting Assets guidance released last year.
Leave no one behind
It is equally important that JETP Investment Plans prioritise the ‘just’ aspect of the transition, according to Carr.
“The eroding carbon budget means we’re trying to perform quite a significant shift in the economy over a very short period of time,” she said.
“It’s absolutely clear that there is a huge priority for making sure that people most directly affected are supported. It needs to be a collective effort between governments, international bodies, public and private finance, philanthropy, and local stakeholders.”
It is important to note that this is a slightly more contentious point in Vietnam, with a number of climate advocates jailed as part of a crackdown on civil society groups in recent years by the country’s ruling Communist Party.
Indonesia and Vietnam are expected to unveil their Investment Plans by COP28.