Green Finance: Asia’s Blueprint for Sustainable Development

The Asian Development Bank's report, "Fiscal Policy and Sustainable Finance: Enhancing the Role of the Financial Sector in Achieving the Sustainable Development Goals," highlights the importance of integrating climate action into fiscal policies in Asia and the Pacific to mobilize private sector finance. It outlines key strategies such as sustainable finance roadmaps, tax incentives, green sovereign guarantees, green finance subsidies, and sovereign GSS+ bond issuance. The report also identifies implementation gaps and recommends policy design improvements, capacity building, and international cooperation to overcome these barriers.

CoE-EDP, VisionRICoE-EDP, VisionRI | Updated: 14-06-2024 15:53 IST | Created: 14-06-2024 15:53 IST
Green Finance: Asia’s Blueprint for Sustainable Development
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To combat climate change and achieve sustainable development, Asian and Pacific countries are urged to integrate climate action into their fiscal policies. The Asian Development Bank's (ADB) latest report, "Fiscal Policy and Sustainable Finance: Enhancing the Role of the Financial Sector in Achieving the Sustainable Development Goals," outlines how strategic financial reforms can unlock the private sector investments needed to address the region's fast-growing climate challenges.

The Urgency of Sustainable Finance

Climate change severely threatens economic stability and growth in the Asia-Pacific region. The Intergovernmental Panel on Climate Change (IPCC) stresses that limiting global warming to 1.5°C above pre-industrial levels is crucial to avoid catastrophic impacts. Yet, the window for action is closing rapidly. Vulnerable nations are already experiencing rising capital costs due to climate risks, amounting to billions in higher interest payments. Delayed emissions reductions would require even stronger policies and abrupt technological shifts, exacerbating financial and physical risks.

Mobilizing Finance through Fiscal Policies

The ADB report categorizes fiscal policies into three main purposes: ensuring rapid action, steering economies towards greener paths, and simplifying investment decisions. Here are the key policies highlighted:

A well-defined roadmap provides certainty, encouraging investments by outlining policy intentions and timelines. Coordination among government departments, central banks, financial regulators, and private sector players is crucial for success. Such roadmaps can mitigate policy uncertainty, which often hinders investment flow.

Fiscal benefits like tax exemptions and accelerated depreciation reduce the tax burden, promoting climate investments. Malaysia’s tax exemption for green, social, sustainability, and sustainability-linked bonds (GSS+) and sukuk issuance serves as a prime example, encouraging low-carbon activities.

Government guarantees, including partial risk, first-loss, or liquidity guarantees, and de-risk investments, enhance investor confidence in repayment. These guarantees enable longer-term investor participation and reduce the cost of capital for project developers, making more green projects viable for private investment.

Direct subsidies can offset the additional costs of green bonds and other sustainable finance instruments. These include interest rate subsidies or stamp duty exemptions, especially targeting smaller issuers, making green issuance more attractive.

Issuing sovereign GSS+ bonds demonstrates the benefits to the market, attracting international investors and boosting demand. This helps finance a country’s net-zero pledges and provides lower-cost financing. Sovereign issuance also signals a strong commitment to climate goals, fostering a local green bond market.

Addressing Implementation Gaps

Despite the promising policies, several barriers impede the growth of sustainable finance markets in the ASEAN+3 region. Identifying sustainable activities and the lack of data on project sustainability hinder investments. Climate risks are often underestimated due to short-term and backward-looking assessments. There is a lack of suitable investments and high costs of feasibility studies, making it challenging to develop a pipeline of sustainable projects. Additionally, many projects are small-scale, reliant on loan financing, and not attractive to institutional investors. The region's predominance of micro, small, and medium-sized enterprises (MSMEs), lack of long-term debt financing, cross-border policy inconsistencies, and presence of fossil fuel incumbents create structural challenges. MSMEs, in particular, struggle to tap into the capital markets and access international sustainable investment flows.

Recommendations for Effective Implementation

To overcome these barriers, the ADB report suggests developing comprehensive sustainable finance roadmaps that coordinate policies across various government departments and engage stakeholders during development and implementation. Providing training and resources to financial actors to assess climate risks, issue green finance instruments, and conduct climate risk and opportunity assessments enables the mainstreaming of sustainable finance across the financial system. Implementing supportive real economy policies, such as green quantitative easing and blended finance, to complement fiscal policies helps create an enabling environment for sustainable finance. Engaging with other countries to align and standardize approaches facilitates cross-border finance flows. Learning from international experiences can help develop robust policies and stimulate investments.

The ADB’s report underscores that integrating climate action into fiscal policies is vital for mobilizing private sector finance and achieving the Sustainable Development Goals. Coordinated and comprehensive fiscal policies, supported by strong stakeholder engagement and international cooperation, are essential to drive sustainable finance and mitigate climate impacts.

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