Foreign investment the key to Southeast Asia’s energy transition

Technological advances and a political push towards more sustainability are driving a global transition from fossil fuels to renewable energy.

Sam Chan, Equity Research Analyst at Pictet Wealth Management, believes Southeast Asia could play a crucial role in that transition. A vital link in the global manufacturing chain, the Association of Southeast Asian Nations (ASEAN)* region currently accounts for just 5% of global carbon emissions, but it is one of the fastest-growing economic areas and a key driver of global energy demand.¹

According to the International Energy Agency (IEA), energy demand in Southeast Asia has increased by around 3% a year, on average, over the past two decades – and the IEA anticipates that this trend will continue until at least 2030.² Critically, fossil fuels are expected to meet three-quarters of the increase in energy demand, leading to a near 35% increase in CO₂ emissions.

The reliance on fossil fuels is unsurprising, given that Southeast Asia possesses these resources in abundance. Fortunately, the region is also well endowed with renewable energy resources such as hydro, solar and geothermal power – and in some places, such as Vietnam, wind power.

Green ambitions

Governments across the region are setting out goals to encourage the shift to renewable energy: six Southeast Asian countries have already announced targets for net-zero emissions and carbon neutrality.³ Sam adds that Environmental, Social and Governance (ESG) adoption has accelerated recently in the corporate sector. Around 225 listed companies in the six biggest ASEAN economies (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) are now rated as having high ESG scores, compared with just 177 six months previously.⁴

It is important to recognise, however, that Southeast Asia is a highly diverse region. Manufacturing capability, for example, varies widely. Thailand is aiming to leverage its manufacturing expertise to attract automakers to produce and sell electric vehicles (EVs). Several Chinese manufacturers are already building production facilities in the kingdom. Meanwhile, Indonesia is catching up, says Sam: the country is taking steps to speed up the shift to domestic EV usage and to attract foreign direct investment (FDI) to build EV and battery production facilities.⁵ The Philippines and Vietnam are also attracting large investments in EV production facilities and could become major players.^6,7

Natural advantages

Sam points out that the region has an abundance of the raw materials required for clean-energy products, which could boost its manufacturing ambitions in this area. Indonesia and the Philippines are rich in resources such as nickel, a key component in many renewable products. Each wind turbine contains around 2000 kilograms of nickel,⁸ and the metal is a critical ingredient in the batteries that power EVs. Meanwhile, Indonesia and Myanmar are the second- and third-largest producers of tin, which is essential in the making of solar panels, and Myanmar accounts for 13% of global production of the rare earth elements used in EVs and solar cells.⁹

Attracting FDI in the new technologies underlying wind and other renewable energies is vital, says Sam, if the region is to become a manufacturing powerhouse supporting the transition. But, he adds, that is difficult because “every country in the world wants to become a leader in this field and there is a reluctance to share intellectual property”.

Winning investment in the production of renewables is also critical if the region is to reach ASEAN’s target of generating 23% of the primary energy supply from renewables by 2025. That would require USD27 billion of investment every year, yet the ASEAN countries attracted no more than USD8 billion annually from 2016 to 2021.¹⁰

The difficulty of integrating renewable energy sources such as solar and wind power into the national grid highlights the need for greater investment in, for example, transmission networks. Take Vietnam, which has experienced an unprecedented boom in solar-energy investment in recent years: its solar capacity grew 200-fold from 85 MW in 2017 to nearly 17,000 MW in 2021.¹¹ The following year, however, the authorities began asking renewable-energy farms to limit their operations; upgrading a national grid takes longer than simply adding capacity.

Green issues yet to set the political agenda

Organisations such as the Asian Development Bank often say that Southeast Asia is on “the frontline of climate change”.¹² The region certainly faces a myriad of problems. These include the “burning season”, when farmers slash and burn large areas of land to clear it for agricultural purposes, creating significant air pollution. Then there is the reported increase in the frequency and intensity of typhoons hitting the Philippines, which is blamed on climate change.¹³ Yet, it is notable that environmental issues do not appear to command the public’s attention: there are no major green parties in Southeast Asia, even though they have risen to prominence in many other parts of the world.

That may change as living standards rise and the middle class increases in size. The Yusof Ishak Institute (formerly the Institute of Southeast Asian Studies) in Singapore certainly thinks so. It has argued that:

“Recent surveys in both Malaysia and Thailand have indicated high levels of public dissatisfaction with climate change policies of their respective governments. Malaysia has just implemented the new voting age of 18 — reduced from 21 previously — and automatic voter registration, which in tandem herald a much bigger say by its youth [who tend to be most concerned about ESG issues] in future national polls.”¹⁴

There is also an increasing focus on ESG issues in the region, according to analysts such as Sustainable Fitch, which has noted a marked increase in awareness and adoption of ESG-related policies and metrics across Southeast Asia. Fitch adds that there is a heavier emphasis on addressing environmental issues than on social and governance aspects.¹⁵  It notes that Southeast Asian countries are among the most exposed to threats from climate change, such as extreme weather events.

Corporate governance has nevertheless improved markedly in many countries, according to the International Finance Corporation.¹⁶  The “S” pillar has received the least attention from investors and analysts, mainly due to a lack of public information.¹⁷ Overall, however, countries across the region are catching up fast with global ESG standards. More than 85% of Vietnam’s 500 fastest-growing companies, for example, have committed to or plan to comply with ESG standards, according to a survey conducted by the Vietnam Report Company.¹⁸

In conclusion, Southeast Asia has made progress – albeit slow progress – in reducing its dependence on fossil fuels: renewable energy’s share of the energy mix increased to 14% in 2020, from around 12% in 2010. The policy environment increasingly favours low-carbon energy, and Vietnam’s success in the global solar market shows what is possible when political will, sectoral reform and market incentives combine, according to the World Economic Forum. Given Southeast Asia’s previous success in attracting growth-generating FDI across economies, and its natural advantages in terms of abundant resources, the region certainly has huge potential to contribute to the global energy transition.