It was unexpected news. Early into the year, BlackRock, the world’s largest asset manager, joined the fossil fuel divestment movement. The company’s CEO Larry Fink announced that the financial behemoth would divest actively managed funds from and make no future direct investments to companies that generate more than 25% of their revenue from thermal coal production. Such a high-profile pledge epitomises a changing landscape. As the global low-carbon energy transition progresses, finance is slowly but steadily abandoning fossil fuels.
This is very good news for the world’s limited carbon budget. But in South East Asia (SEA), policy makers should sit up and take notice. The region’s low- and middle-income countries are heavily dependent on fossil fuels, their development strategies rely on having profitable coal, oil and gas industries using readily available capital. Fossil fuel divestment may become a spanner thrown into the works of these plans. But timely and targeted policy action can instead leverage it to keep fossil fuels in the ground while unleashing much-needed financial resources for fast tracking low-carbon strategies to sustainable development.
Divestment could be a spanner jamming SEA’s development
BlackRock’s move is only the latest high-profile pledge of fossil fuel divestment. 2019 saw a string of announcements from the European Investment Bank, BNP Paribas Asset Management and Singapore’s big three DBS, UOB and OCBC, among others. In 2018 divestment pledges spanned 37 countries and 985 institutional investors with jointly USD6.24 trillion in assets. This trend is gaining traction, maybe less for ethical reasons or shareholder pressure but because it makes sense financially.
Around the world, regulatory climate action under the Paris Agreement plus technological innovation and low renewable energy costs are raising risks for fossil fuel investments. Chief among the so-called transition risks is asset stranding: when assets – both upstream (reserves and production facilities) and downstream (power generation and distribution utilities) devaluate or become liabilities earlier than expected. For holders of high-carbon portfolios, divestment is a precautionary measure against asset stranding and the erasure of shareholder value.
In developing SEA, this should sound the alarm. Indonesia, the world’s biggest coal exporter, has coal plant assets worth USD35 billion at risk of stranding, while in the Philippines USD13 billion are at risk. According to the International Institute for Sustainable Development, the economies of Malaysia, Vietnam and Cambodia are also potentially vulnerable to carbon
transition risks. The regional grassroots divestment movement is adding further pressure: last year the Asian People’s Movement on Debt and Development (APMDD) led international protests to demand Japanese trading companies follow through on their celebrated divestment pledges and pull out of coal projects in Vietnam and Indonesia.
Low- and middle-income economies of SEA are currently locked into an extractivist growth model based on exploiting their rich fossil fuel reserves, be it for exports or to serve soaring domestic demand for affordable energy. They rely on development finance and private capital to cash in on their reserves. But divestment may tighten markets in which these countries are already facing mounting difficulty to secure competitive financing for new coal facilities.
This means that the timeframe for the region’s profitable fossil fuel production is shrinking and delayed policy action will elevate the opportunity costs of staying on a high-carbon path. Stranding coal and oil assets could compromise state revenues and affect government spending, while insufficient investment can jeopardise domestic power supply, hitting the
poorest households hardest.
But we can turn divestment from a spanner into a lever
With the right policy framework, fossil fuel divestment can become an opportunity to decarbonise SEA’s development pathways by fast-tracking a just transition to clean, affordable energy and by leapfrogging to low-carbon alternative drivers of sustainable development. For this, SEA policy makers must proactively address capital flight from fossil fuels by...
...anticipating divestment
Governments need clear estimates of potential asset stranding in their national contexts. They need multi-decade scenarios of how their high-carbon economic sectors could evolve. A clearer picture of where risks are lowest and easiest to be addressed will serve to anticipate divestment, thereby protecting local equities. For this, collaboration with researchers and development agencies is key.
Governments also need information from investors for investors. A recent study by the Stockholm Environment Institute finds that energy investors in SEA, who are mostly local or regional, still display little awareness of climate change and transition risks. Private sector-led initiatives such as the Task Force on Climate-related Financial Disclosures are calling on companies to disclose the resilience of their portfolios to climate change and transition risks. Governments can simply support such transparency initiatives or actively participate in developing reporting standards and even mandate disclosure.
...steering reinvestment
Fossil fuel divestment does not mean that capital is automatically reallocated to clean energy. But it should. Despite the region’s abundant renewable sources, the IEA finds that in 2018 investments in the region’s power sector were less than half of what is needed annually for countries to advance towards their emission reduction targets. Attracting divested private capital can help close this finance gap. Beyond renewables, reinvestment could advance green construction and low-carbon transport as well as sustainable agriculture. Given the high vulnerability of SEA to climate change, it could also fast-track innovation for local mitigation and adaptation strategies.
Divestors will need a conducive environment for reallocating their capital in SEA’s developing countries. This means making low-carbon portfolios more bankable and safer through incentives and regulation. The task for governments is to design and implement robust procurement frameworks for low-carbon industries, to generally strengthen national financial systems by improving governance, and to boost new financial instruments such as green bonds and blended financing mechanisms such as impact funds.
...redefining development strategies
Every planned coal-powered plant, every budgeted export oil barrel locks SEA’s developing countries into fossil fuels-dependent development pathways. As long as high-carbon industries remain the cornerstones of growth strategies, SEA will remain highly vulnerable to climate change and to the risks of transitioning the global economy to a low-carbon future.
Reducing exposure to these risks can only be done holistically. National development plans are effective tools but only if visions, goals and priorities are set around a low-carbon diversification of the economies and a carefully calibrated phase out of coal, oil and eventually gas. With coherent and bold policies, governments can do more than just react to transition risks such as divestment – they can benefit from them for achieving sustainable development within a just transition.
(Photo: Han Jun Zeng)