This edition looks at the tension between public and private capital in deploying into climate assets, and the challenge investors have in translating climate data into investment decisions.
Public vs private capital
Global investors are increasingly keen to deploy capital into energy transition infrastructure and related climate solutions, according to findings by the Asia Investor Group on Climate Change (AIGCC).
Notably, both asset owners and managers alike are moving beyond exclusion strategies and passive divestment. Data indicates a shift from high-level net zero commitments towards efforts to translate targets into portfolio-level outcomes. Investors are making intentional capital allocation and decisions toward “a real economy transition”.
Indeed, asset owners are already reporting more than 5% annualised returns over a decade while cutting portfolio emissions by 50%, AIGCC found.
Investors surveyed were most eager to deploy into energy storage, renewable energy generation and transmission, green infrastructure, and nature-based solutions. This could be attributed to the maturing of these segments, improving policy certainty in Asian markets, as well as the reduction in costs, particularly for renewables, AIGCC noted.
Yet, some investors looking to scale in these sectors are finding themselves sidelined, especially in the emerging markets they are targeting to enter. This is due not to a constraint in capital supply, but rather to capital structure.
Deep-pocketed public capital – including development finance institutions, multilateral development banks (MDBs), and government-backed special investment vehicles – has been a key player in climate finance. As AIGCC CEO Rebecca Mikula-Wright pointed out, they have “created the necessary architecture” underpinning climate and energy transition investments, particularly in terms of de-risked capital that investors in emerging markets seek.
But there is some concern that these public institutions have so dominated the investment landscape through their participation in large-scale projects and more mature segments that they are instead running the risk of crowding out the very commercial capital that they have been seeking to catalyse.
However, that complaint could also be an indication of how the risk-return profile of climate investments in the region has matured into attractive institutional-grade assets, Mikula-Wright said in an interview with GreenStreet recently.
The issue is that public balance sheets are still favouring safe, large-ticket assets, while private commercial capital is unable to take on the development risks and need for concessional capital that are inherent in many climate projects.
Through AIGCC’s work in Australia, for example, Mikula-Wright noted that government-linked special investment vehicles are still reluctant to take on higher risk. “These vehicles are set up at certain points in time, but they have to evolve as the policy environment, investment environment, climate solutions, and opportunities evolve as well.”
She added: “Arguably, government vehicles are the ones who can and should take high risk. Institutional investors don’t want to take development risk; they want stable, long-term infrastructure types of projects.”
The result is the “missing middle”: The $10-100 million deal range that falls between early-stage research and development needs that could be satisfied with grants and philanthropic capital, and big-ticket project finance that suits established portfolios.
At the same time, there is the so-called emerging market risk that is holding back deployment in the region. Much of this risk could be perceived by asset owners outside the region, who often lack the on-the-ground experience and insights to distinguish between market volatility and structural opportunity, observers say.
To that end, the region’s sovereign wealth funds (SWFs) are emerging as key to this funding gap, even as capital sources for a number of them continue to be from fossil fuel generation.
Unlike traditional MDBs, SWFs enjoy both the political proximity and balance sheet flexibility to act as credible anchors and provide the much-needed “confidence signal” for foreign capital. By taking on subordinated or first-loss tranches, co-investing in a vehicle, or providing long-term off-take agreements, SWFs can bridge the gap between perceived and real risk.
Several SWFs in Asia and the Gulf are already substantially invested in the energy transition here.
Abu Dhabi has created the $30-billion ALTÉRRA platform that has committed to Brookfield’s emerging market energy infrastructure-focused Catalytic Transition Fund. ALTÉRRA also has co-investments, including in India’s renewable energy developer Evren.
Earlier, Danantara Indonesia inked a $10-billion partnership with Riyadh-headquartered ACWA Power to invest in Indonesia’s power and water sectors.
In Singapore, GIC invests in a wide range of low-carbon and renewable energy-related projects, including green hydrogen and green steel, and grid infrastructure solutions.
Ultimately, public capital needs to move upstream towards higher-risk and earlier-stage segments that private capital is unequipped to tackle. As those segments mature, the public institutions would then make way for commercial investors to scale. Otherwise, the market risks being stuck at sub-scale, with public capital inadvertently preventing the very transition it was built to fund.
Solving resilience gaps in SE Asia’s $82b renewable losses
While renewable energy is critical to Southeast Asia’s efforts to cope with climate change, the region’s worsening physical climate risks are also creating a growing challenge for the renewable buildout itself.
Yet, the biggest gap in resilience planning is the ability to translate climate data into asset-level engineering and investment decisions, and to assess the costs and benefits of resilience measures, according to Mark Fletcher, Head of Zurich Resilience Solutions, Asia Pacific, at Zurich Insurance Group.
This is where the industry should move beyond simply identifying physical climate risks, and focus on determining which investments can materially reduce those risks, and how they ultimately translate into balance-sheet impact, according to the executive.
“We see resilience considered too late, often after site selection, design or procurement decisions have already been made and available options have narrowed,” he said.
The stakes are rising as Southeast Asia accelerates its renewable energy ambitions, targeting 45% of installed power capacity by 2030, up from around 33% today.
It is among the world’s most climate-exposed regions, facing material risks from typhoons and flooding to drought, hail and wildfires. Vietnam and the Philippines are particularly vulnerable to economic shocks arising from climate impacts on renewable energy infrastructure.
Zurich Insurance estimates that 75% of renewable energy capacity in the region could be at critical risk of adverse climate impacts by 2030.
Caption note: Value at Risk is an indication of financial exposure caused by climate hazards, including property damage and business interruption. Bubble sizes reflect the GDP of each country.
Without effective resilience measures, around $165 billion of value could be at risk across the portfolio by then. But the report estimates that an upfront investment of about $13 billion — or roughly 2% of total asset value — could prevent more than $82 billion in losses, representing a return of approximately 6.5x on the investment.
“This should not be looked at as an additional cost. It is design optimisation. So, resilience is less a premium someone absorbs, and more an investment in the whole-life performance, insurability and economics of the project,” said Fletcher.
This is a meaningful consideration for developers and investors in the region, as many projects remain in the planning or construction phase, when changes to design and engineering can still be made at relatively low cost and with greater flexibility, resulting in larger commercial benefits.
For assets already in operation, there are still opportunities to strengthen resilience by first identifying the dominant loss drivers, then prioritising improvements based on risk reduction relative to cost. “Drainage, vegetation management, monitoring and operational procedures can all be retrofitted efficiently,” Fletcher added.
“Resilience is ultimately a marker of asset quality,” he claimed. That makes resilience not just a risk-management issue, but increasingly a financing consideration.
While a quantified climate value at risk figure is not yet consistently embedded across transactions, it is starting to feature in investment conversations and valuation considerations.
The implications extend across the capital structure. Developers stand to gain greater operational continuity, while lenders and investors can benefit from stronger risk profiles and better protection of asset value, according to Fletcher. At the system level, it can support more reliable generation, higher revenue streams, and reduced losses.
Deals in July
Climate-related deals retained momentum across Southeast Asia in July. In Vietnam, Grab sealed a strategic investment in charging infrastructure company EBOOST, eight months after their business partnership to enhance green mobility in the country.
Meanwhile, Singapore-based agritech startup Rize closed a $31-million Series B financing, comprising $20 million in equity and $11 million in debt from investors including BNP Paribas Asset Management Alts, The Rockefeller Foundation, Temasek, Breakthrough Energy Ventures, UOB and the Bank for Investment and Development of Vietnam.
Other startups from Singapore – alternative protein company TurtleTree Labs and solar energy firm PCG Global – have also secured early-stage funding.
Investments into Indonesian climate tech firms include electric vehicle maker Aerion Motors and Regenesis Materials – a circular materials producer for the fashion industry.
Haup, a Thai ride-sharing platform, also raised a $5-million Series A round.
