On 11 November 2024, the ASEAN Capital Markets Forum (“ACMF“) published the “Working Paper on a Practical Approach to Transition Finance in Asia” (“Working Paper“), which was developed under the Asia Green Transformation (“GX“) Consortium and endorsed by all the original consortium members including ACMF. The Working Paper summarises discussions from the technical meetings held in the run-up to the consortium launch, highlighting observations of importance such as mobilising funds for climate transition, the role of and the regional implementation of blended finance, and discussion among diverse stakeholders.
By way of background, the Asia GX Consortium was launched in Tokyo on 2 October 2024 with the aim to guide finance toward an orderly and just transition in Asia by developing shared transition finance approaches, incorporating regional frameworks. The focus areas of discussions in the Asia GX Consortium are transition finance practices and implementations in Asia, with reference to finance cases and efforts in the region such as:
- ASEAN Taxonomy for Sustainable Finance;
- ASEAN Transition Finance Guidance (“ATFG“);
- Japan’s transition finance strategies;
- Four key transition financing strategies by Glasgow Financial Alliance for Net Zero (“GFANZ“);
- Asia Transition Finance Guidelines by the Asia Transition Finance Study Group; and
- Other relevant frameworks and guides.
The Working Paper emphasises the need for scalable transition finance to support Asia’s climate goals and attract investment opportunities in the region. A summary of the key areas from various technical discussions is as follows:
- Transition finance flows in this region have yet to adequately scale to meet the significant demand. The Asia GX Consortium should facilitate the transition finance flows and project developments and should continue to monitor the flows and the status of projects in the ASEAN region. Further, investors and financial institutions (“FIs“) providing transition finance need to be mindful of the interrelationships between individual projects, companies, sectors, countries, and enabling policy frameworks and actions.
- Strategies for “Aligning” and “Transitional Activity” that take into account regional contexts, while avoiding lock-in effects, are critical and urgent areas where funds have to be mobilised for climate mitigation. The “Aligning” transition finance strategy outlined by GFANZ, and the broader transition tiers outlined by ATFG (i.e., “Aligned and Aligning 1.5°C”, “Aligned and Aligning Well below 2°C”, and “Progressing”) that additionally balance the importance of a just transition, provide more inclusive and regional context to transition finance strategies.
- Credibility assessment of transition plans should be distinguished at the corporate and transaction levels.
At the corporate level, the current lack of regional and sectoral benchmarks for emissions reduction pathways is a challenge. However, guardrails that can help ensure that transition efforts are not delayed, and that greenwashing concerns are avoided, include governance measures, organisation- and activity-level monitoring processes, disclosure, risk assessment and independent verification.At the transaction level, taxonomies with transition categories and the use of digital technologies that enhance data quality and quantity will help ensure the credibility and viability in the use of funds. FIs can clarify transition opportunities and identify capital and financing opportunities through an engagement strategy, using corporate transition plans as a starting point. Additionally, FIs can support corporations that have yet to have a transition plan in formulating one.
- Bankability is analysed through a combination of a financial lens (e.g., the cashflow a certain project generates) and a non-financial lens (e.g., the technology the project utilises and other relevant factors). To overcome financing challenges for emerging technology projects with low track record and relatively high perceived risk sentiments among investors, projects can leverage tools and mechanisms that reallocate risk-sharing such as blended finance (e.g., subordinated debt financing, guarantees, grants, and insurance) and carbon credits (e.g. transition credits for early retirement of coal-fired power plants). As a coordinating hub, the Asia GX Consortium will facilitate discussions on blended finance among private FIs and multinational development banks or development FIs to clarify the risks profiles of corresponding entities and identify potential projects.
Overall, the Working Paper outlines approaches and strategies emphasising regional cooperation and information exchanges to accelerate capital flows into transition efforts. Synchronising the transition through capital allocation and real economy activities will require a sound transition governance at work at multiple levels, from regulatory and policy frameworks to governance at the company and transaction level.
Click on the following links for more information (available on the ACMF website at www.theacmf.org):
- ACMF News Release titled “Working Paper on a Practical Approach to Transition Finance in Asia“
- Working Paper on a Practical Approach to Transition Finance in Asia
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