Public enterprises and energy transition in Asia

Author: Christoph Nedopil Wang, Fudan University

State-owned enterprises (SOEs) in Asia are in a unique position to play a leading role in transforming economic activity from dirty to green. Yet, so far, most public companies have underutilized green financial instruments, such as green bonds, to support this transition. This leaves ample room for growth that could spur new investment in innovative and green technologies, support the development of green capital markets and reduce climate change risks.

Given the commitment of Asian countries to accelerate their energy transition to achieve ambitious carbon reduction targets, public companies, including their regulators and owners, must urgently transform their business operations. SOEs hold a monopoly on power generation and transmission in many Asian countries and account for around 60% of infrastructure investment and up to 70% of fossil fuel and energy transition investment .

With these assets in the sectors in place, SOEs globally “are responsible for at least 7.49 gigatonnes of carbon dioxide equivalent per year in direct emissions (Scope 1)…l “actual scale of SOE-related emissions likely to be significantly higher,” according to a preliminary study. Inventory published by the Center on Global Energy Policy (2022). This equates to at least 15% of direct global greenhouse gas emissions. In addition to these scope 1 emissions – direct emissions from the combustion of fossil fuels – public companies also play an important role in the extraction of fossil fuels, while public financial institutions hold significant assets in high-risk sectors. emissions.

Switching state-owned enterprises from brown energy to green energy will require the investment of billions. Money is needed to increase overall electricity production and relocate existing assets by shutting down coal-fired power plants early, while ensuring the provision of public services and creating much-needed jobs. In 2017, the Asian Development Bank reported that developing Asia alone would need around US$26 trillion in infrastructure financing alone between 2016 and 2030 “to maintain its growth momentum, fighting poverty and responding to climate change”, especially in sectors that affect the climate. emissions.

In addition to shifting power generation from fossil fuels to green energy, massive investments are needed in the transportation sector to support green and public transport, and in the agricultural sector to shift from land-demanding practices to more effective options and plant-based food supplies.

As public funding is stretched – notably due to global sovereign debt issues in the wake of the COVID-19 pandemic – SOEs must assess how to quickly raise the necessary funds from different sources, including capital markets. local and global. Fortunately, public companies have a sustainable financing toolkit.

Green bonds are one such financial instrument that has attracted a lot of attention. The use of green bonds is booming due to the widespread development of green bond standards and green bond markets. In much of Asia, ASEAN green bond standards have become the norm, while countries like China have expanded their 2016 Green Bond Catalog (renewed in 2020) and Indonesia has released its taxonomy of green finance earlier in 2022. This has enabled the green bond market in developing Asia to reach US$94.2 billion in issuance in 2021.

Despite their central role in the green transition, state-owned enterprises in developing Asia play only a minor role in green bond markets, with one exception. Chinese state-owned enterprises issued about US$217 billion in green bonds between 2015 and March 2022. This equates to about 42% of the total green bond market in China, compared to 18% for developing countries in Asia. For Asian SOEs, this leaves plenty of room for growth in green bond issuance.

The continued use of green bonds by Asian SOEs would have four direct benefits. First, unlike public debt, commercial or non-sovereign borrowing does not swell already overstretched public coffers.

Second, access to capital markets can boost the efficiency of state-owned enterprises, as it requires financial viability and acceptable levels of transparency. Some governments may also welcome the resulting financial market oversight to improve the corporate governance of their state-owned enterprises.

Third, green investments by public companies will lead to increased demand for green technologies, such as new energy grids, which in turn will support private companies. This leads to new jobs, often in sectors with higher added value.

Finally, the issuance of green bonds by public companies can also accelerate the development of the local green bond market. By using local capital markets to raise funds, SOE financing can attract more international investors, who often lament the lack of project pipelines and high-risk investments in emerging markets. SOEs can provide both more projects and lower risk projects. Issuance of green bonds by SOEs would further support capacity building of local investors and auditors and could stimulate new private sector investment.

To make SOEs more bankable and accelerate the use of green bonds, SOEs need to develop appropriate governance systems vis-à-vis their government owners that allow them to raise funds in capital markets. They must also establish a credible green strategy and ability to attract investors, as well as relevant monitoring, reporting and verification capacity to provide information on procedures or the impact of the sustainability-related instrument to investors.

Although green bonds are not without risk and state-owned enterprises need to build the necessary capacity to issue them, their widespread use has the potential to accelerate the green transition that Asian economies so badly need.

Christoph Nedopil Wang is founding director of the Green Finance & Development Center and associate professor at the Fanhai International School of Finance at Fudan University in Shanghai, China.

This article appeared in the latest edition of East Asia Quarterly ForumAsia’s digital future‘, Volume 14, No. 2.

Melvin B. Baillie