Rising climate development finance yet outlook uncertain

Southeast Asia is expected to experience more economic loss than other parts of the globe as a result of climate change. According to the Global Climate Risk Index, four Association of Southeast Asian Nations (ASEAN) countries — Myanmar, the Philippines, Vietnam and Thailand — were among the top ten countries most affected by extreme weather events between 1999 and 2018. Six of them are forecast to be among 20 countries most vulnerable to climate change.

Southeast Asian nations have acknowledged the risks posed by climate change and have taken measures to address them, such as setting decarbonisation targets and pledging reduction plans in their nationally determined contributions. Most have also set more ambitious carbon emission reductions targets conditional upon receiving assistance from advanced economies.

The Southeast Asia Aid Map finds that climate development finance is rising, but not fast enough to meet the needs of the region.

Steady rise but mixed outlook

Between 2015 and 2021, climate development finance disbursements in Southeast Asia averaged $8.3 billion annually, totalling more than $58 billion, or 29% of official development finance (ODF) disbursed in the region during this period. The number of projects marked by the Southeast Asia Aid Map as “significant” (where climate change mitigation or adaptation is explicitly stated but not fundamental) far exceeded those marked “principal” (where climate change mitigation or adaptation is explicitly stated as fundamental to the project). The highest sum of principal projects was recorded in 2021, reflecting an increased focus on climate action by the international community. Over the period, climate development finance (that is, including both significant and principal projects) increased by 59%. But the entire increase in climate development finance was through projects rated as having a significant climate objective. By contrast, projects with a primary focus on climate-related objectives remained flat in volume terms and actually decreased in proportion to total climate-related ODF.

In addition, notwithstanding the rising disbursement of climate-related ODF, there was an 18% decline in new commitments to climate-related projects from 2015 to 2021, despite growing financing needs for climate initiatives in Southeast Asia.

What’s more, loans consistently made up more than 80% of the $58 billion disbursed in climate-related projects over the 2015–21 period. Of this debt finance, less than half (44%) was concessional.

Laos, Myanmar, and Timor-Leste received 89%, 49%, and 30% respectively of their climate finance in the form of debt instruments. This amounted to around $5.8 billion, $1.7 billion, and $195 million respectively over seven years. The overall debt burden in these countries was already high. China, Japan, and the Asian Development Bank (ADB) were the major lenders in climate-related projects in those countries, providing 88%, 45%, and 78% of loans respectively.

In contrast, Germany, the United Kingdom, and Australia were the main providers of grant-based finance in those countries.

Disparities in disbursements

Indonesia, the region’s largest economy, was the largest recipient of climate development finance, receiving more than $16.5 billion between 2015 and 2021. The Philippines ($11.1 billion), Vietnam ($10.3 billion), and Laos ($6.6 billion) followed as the next major recipients. Timor-Leste and Malaysia trailed by a significant margin, receiving $1.2 billion and $650 million respectively.

There have been some notable changes in climate development finance trends in the region in recent years. Indonesia received a significant increase in funding in 2016 as the result of loans for two projects: one from the ADB for the Sustainable Energy Access in Eastern Indonesia — Electricity Grid Development Program XM-DAC-46004-50016-001-LN3560; and one from the World Bank for the Power Distribution Development Program-for-Results 2016026356 - P154805.IBRD86100.crs1. The Philippines received additional climate finance in 2017 for the implementation of the Kapitbisig Laban sa Kahirapan — Comprehensive and Integrated Delivery of Social Services Project 2016026356 - P154805.IBRD86100.crs1, funded by the ADB.

Vietnam’s average annual disbursements for climate-related projects remained just under $1.5 billion, with mild growth since 2019. Malaysia had a surge in climate development financing in 2017 due to loans from Chinese state-owned policy banks for clean energy projects, but since then it has dropped back to almost negligible levels. Laos, which was the third-largest recipient of climate development finance in Southeast Asia in 2015, has seen a consistent decline in funding, largely due to a decrease in China’s disbursements in the country’s energy sector.

Due to the large disparity in country population across the region, evaluating ODF on an annual average per capita basis provides a more accurate understanding of climate development financing. Laos comes out far ahead of other Southeast Asian countries, with $883 per Laotian, and a yearly average of $126 in climate-related development finance spent per person. Malaysia, a mid-sized regional economy, is last, with $36 per capita over the whole period, and just $5 per capita per year. Meanwhile, Myanmar, the region’s poorest country with a GDP per capita of just $1,209 (2021), received a relatively modest yearly average of $4.30 per capita, compared to $29 and $70 for Cambodia and Timor-Leste respectively. Despite being the top destination for climate development finance in volume terms, Indonesia’s large population means the average annual per capita spend was only $8.62.

Asian Development Bank, Japan, and China dominate

Between 2015 and 2021, the ADB was the largest provider of climate development finance, providing an average of $1.9 billion annually in the region. But Japan — the top contributor to the ADB — was by far the largest bilateral provider of climate development finance in Southeast Asia. Over the period reviewed, Japan provided $1.7 billion annually to Southeast Asia, or 35% of its total bilateral climate development finance. This was significantly higher than China, which provided 23%. South Korea provided 8%.

Over the period, the ADB allocated 43% of its total development finance flows in Southeast Asia to projects related to climate change, Japan 44%, China 21%, and Korea 13%.

It is noteworthy that both the ADB and Japan’s contributions to the region were concentrated in Indonesia, the Philippines, and Vietnam. China allocated more than five times more climate development financing to Laos (64%) than its second-biggest recipient, Malaysia (12%). By contrast, other countries opted to distribute their support across the region. Multilateral partners or those outside the region, such as European countries and EU institutions, often preferred to provide climate development finance to regional initiatives rather than to specific countries.

Non-traditional development partners (non-members of the OECD Development Assistance Committee, such as China), provide a sizeable amount of climate development finance to Southeast Asia in the form of loans instead of grants. From 2015 to 2021, non-traditional partners provided around 20% of their total disbursements to climate development projects, while traditional partners allocated 32% of their ODF to climate financing. Non-traditional partners tended to focus their financing on Laos, while larger economies — such as Indonesia and the Philippines — received comparatively little climate finance from non-traditional partners.

Between 2015 and 2018, China was the largest non-traditional partner for climate spending, mostly due to a series of disbursements for the Nam Ou Hydropower Project in Laos (Lao005). But Beijing’s regional disbursements peaked in 2017 at $1.9 billion and fell to just $450 million by 2021. China provided most of its finance through non-concessional loans, while Japan’s financing generally took the form of concessional loans.

Purpose-specific funds (e.g. Climate Investment Fund, Global Environment Facility, Global Green Growth Institute, Green Climate Fund, and Adaptation Fund) contributed $910 million over the period in climate-relevant financing to Southeast Asia. This amounted to less than 2% of the total climate development financing over the period. However, it is noteworthy that 54% of these projects received a rating indicating a principal focus on climate, while 46% were rated as having a significant climate focus.

Challenges in financing the energy transition

Most climate development finance was spent in the energy sector, primarily on developing centralised electricity transmission grids and hydro-electric power plants.

Disbursements in the energy sector peaked in 2017. This was driven by large Chinese projects such as the Nam Ou Hydropower Project in Laos Lao005, funded by the China Development Bank, and the Hanuman Wind Farm Project in Thailand Tha002, financed by the Export–Import Bank of China. Overall energy-related development financing declined after 2017 but remains the main focus within the wider category of climate-related initiatives.

The second-largest sector in terms of climate-related disbursements was transport and storage, which was dominated by rail infrastructure. Most notable was the Mass Transit System Project in Bangkok 2016003059 - JICATXXXIV-1, funded by the Japanese International Cooperation Agency (JICA) via a $1.5 billion concessional loan and marked as having a principal focus on addressing climate change.

Meanwhile, sub-sectors that specifically address adaptation — such as disaster preparedness, water supply and sanitation, and reconstruction and rehabilitation — received a total of less than $700 million per year, despite their critical importance.

Despite increasing global efforts to transition to low-emissions energy generation, development finance in Southeast Asia for non-renewable energy projects (coal, oil, gas, and waste-fired) have consistently been higher than funding for renewable energy (hydro, solar, wind, marine, geothermal, and biofuel-fired). Since 2015, a total of $12.3 billion of development finance has been spent across the region on non-renewable energy projects, compared to $7.6 billion on renewable projects. China was the region’s major funding partner in both categories (62% of all renewable financing, and 64% of all non-renewable financing), followed by the World Bank for renewables (11%) and Korea for non-renewables (21%).

What’s more, while financing for non-renewable energy projects declined significantly, so too did financing for renewable energy projects. Therefore, the shift in financing focus was only accomplished by a substantial reduction in overall energy-focused development finance, despite the region’s need for increased and cleaner energy.

Several of the region’s major development partners have signalled a reduction in funding for non-renewables in the future. The ADB’s 2021 Energy Policy flagged that it will not fund new coal-fired power generation or gas exploration in the region. Japan signed a G7 agreement to end public financing for unabated fossil fuel projects by the end of 2022. China’s President Xi Jinping announced to the United Nations General Assembly in September 2021 that China would not build any more coal power stations overseas. The World Bank stopped investing in upstream oil and gas in 2019, and in the 2021 fiscal year it provided zero funding for new fossil fuels.

Overall, the pace of progress towards achieving a significant increase in renewable development projects while also supporting greater regional energy needs seems insufficient to facilitate the region’s shift towards a resilient low-carbon future.

Country snapshots of climate related financing (2015–21)