Asean needs track record in returns from ESG projects to attract private capital
Srini Nagarajan, who is managing director and head of Asia at British International Investment (BII), noted that, for that to happen, the region needs to develop a regulatory framework that is steady and favourable towards sustainability-focused investments, as well as streamline the processes in executing such projects, such as in land acquisition rights, grid infrastructure and transmission networks.
This is all the more important in the current environment where interest rates are elevated, as the incentives for investing in emerging markets have become much more strained, added Nagarajan, who was speaking with The Business Times.
'South-east Asia lacks bankable opportunities in the energy transition space... Private investors will come, provided there is a track record of having made money. That's very, very critical... Once you have the track record, the belief in the overall system, goes up substantially,' he said.
'That's how China and India were able to attract private capital. So I think these (South-east Asian) countries are in an evolution stage in that journey. So we need more and more bankable opportunities in these markets. There is a lot of money waiting to come from the OECD (the Organisation for Economic Co-operation and Development) markets in Asia and also the West.'
As a region made up predominantly of emerging markets, the higher risks involved in investing in South-east Asia – whether actual or perceived – have often either kept investors away, or resulted in expectations of a higher premium on returns.
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This has presented a challenge especially in energy transition investments, as sustainable-energy infrastructure tend to be capital-intensive projects.
As a development finance institution, BII's role is to catalyse such private investments by de-risking projects through a patient and flexible approach to risk and returns so as to maximise development impact.
BII entered the South-east Asian market in early 2023 – as part of its expansion plan in Asia – with a mandate of deploying £500 million (S$869.6 million) by 2026 to support the region's energy transition towards a low-carbon economy.
It has committed more than £206 million thus far, including a US$80 million partnership with a debt-financing platform, Pentagreen Capital, that has Temasek and HSBC as its founding shareholders.
The capital is also deployed via two other investing platforms – Skye Renewables and Sustainable Asia Renewable Assets – which BII has established with other partners.
Besides such platforms, it also invests directly through debt, equity or a hybrid of both – which is known as mezzanine – and indirectly through funds, as well as provides loans to commercial banks to help small and medium-sized enterprises become more environmentally sustainable. As at the end of 2023, BII's portfolio value in South-east Asia was US$53 million across 27 companies.
As a whole, it has committed to channel 30 per cent of its annual new commitments towards climate, and South-east Asia is an important market for BII to deliver on these mandates.
Investment focus
The impact investor's investment focus in the region are: utility-scale clean-energy projects, commercial and industrial power generation for corporates, water and waste management, electric vehicles (EVs) and EV infrastructure, as well as waste-to-energy facilities.
In particular, BII is prioritising markets including Indonesia, the Philippines, and Vietnam, given their vulnerability to the impacts of climate changes, reliance on fossil fuels, lack of bankable projects, as well as significant need for private capital.
'I think that's where our capital is much more relevant – in these markets. South-east Asia has very diverse markets, with varying degrees of infrastructure development and regulatory environment, which is still evolving.
'And the private-sector investments into the area of renewable energy are very important,' said Nagarajan.
Given its role in mobilising third-party capital, BII takes on high risks in early-stage projects, with the view of bringing in commercial investors once cash flow is generated.
Nagarajan pointed out that, while BII invests in five-year strategy cycles, it has to ensure that its investments are aligned with the timelines of climate initiatives and that these projects do not face premature exits.
As a provider of patient capital, BII said it can afford to act countercyclically and look beyond headline risks.
Hence, while it would definitely have to exit businesses and recycle its capital into newer investment streams, it does not do this due to constraints in a fund's life. Rather, its exits are a result of businesses maturing and being able to attract more commercial capital, and thus requiring less development capital.
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