Issue 148: South-east Asia's strategic bet on sustainability; Sembcorp's renewables win analysts' calls
This week in ESG: Top South-east Asian representatives reaffirm commitment to sustainability; Goldman Sachs initiates 'buy' call on Sembcorp Industries
Sustainable finance
South-east Asia's crisis opportunities
The current atmosphere of political and economic uncertainty around the world gives South-east Asia an opportunity to invest in a more sustainable and resilient future. But policymakers and regulators must take the lead with clear goals and credible plans.
Top South-east Asian representatives at the recent Ecosperity conference sought to reaffirm the region's commitment to sustainable finance. Malaysia's Natural Resources and Environmental Sustainability Minister Nik Nazmi Nik Ahmad urged protection of South-east Asia's population and coastal cities, and said that climate cooperation must 'continue in tandem' with resolving tariff issues.
Malaysia is the current chair of the Association of South-east Asian Nations (Asean).
Also at the conference, representatives of the Asean Taxonomy Board (ATB) made the case that enhancement of the region's eligibility definitions for sustainable finance continues apace. Mardini Haji Eddie, current ATB chair and deputy managing director for monetary operations, development and international at Brunei's central bank, gave insight into a new digital tool provided by ATB to help map activities across different taxonomies.
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Eugene Wong, chief executive of the Sustainable Finance Institute Asia (SFIA), the think tank that hosts the ATB, said that Asean intends to hold the line as a vocal leader on sustainable finance.
The common message: Sustainability and sustainable finance in South-east Asia are still very much in business.
Tariffs and unpredictable policy from the US threaten to dampen business investment and consumer demand around the world, with fears of a global recession. An economic slowdown could prompt governments to provide fiscal support. If so, fiscal responses in South-east Asia should include investments and spending in sustainable development to ensure that policy support goes towards strengthening the region's economies for future conditions.
This could be the time to step up investments in climate adaptation and resilience.
South-east Asia has an elevated exposure to climate risk, several studies have shown. For instance, the Philippines and Indonesia consistently top the World Risk Index, which measures exposure and vulnerability to natural disasters. Of the 10 Asean member states, only three – Brunei, Laos and Singapore – have less risk than the global median in the index.
A working paper by the Asian Development Bank estimates that economic losses due to climate change in 2100 in Brunei, Malaysia, Singapore and Thailand could be more than 15 per cent of GDP under a low-emissions scenario and more than 55 per cent of GDP under a high-emissions scenario.
Despite those risks, adaptation spending in the region is sorely lacking. The strategic use of public funds to finance and catalyse investments in climate adaptation and resilience can address several needs at the same time.
There is also an opportunity to accelerate the development of nature financing in the region, which is rich in natural resources and is highly dependent on agriculture and mining. Protecting and improving the resilience of the region's natural capital is a sound long-term investment.
As SFIA's Wong also highlighted, addressing social development goals should also be on the agenda. When times are tough, supporting and uplifting the more vulnerable parts of society aren't merely humane policies, they're also good economic ones.
But for all the positive messaging that South-east Asia is sending out, bold words must be backed by bold action.
The region's governments need to commit to clear national climate targets and strategies, and apply those ambitions through credible policies.
To date, Singapore is the only South-east Asian country that has submitted its 2035 National Determined Contribution (NDC) under the requirements of the Paris Agreement. The rest of South-east Asia will have to demonstrate their seriousness in dealing with climate change when they submit theirs.
Across borders, greater regional collaboration on energy transition issues – including the Asean power grid and carbon market development – will help to improve impact and attract capital at larger scales.
In burgeoning areas of sustainable finance, including nature and social financing, the markets need more public-private efforts to develop financing taxonomies and pathways that can enable buyers and sellers to transact with confidence.
Every cloud has a silver lining, and every crisis has its opportunities. Played right, the current storm could set South-east Asia on a more sustainable course for the future.
Sustainable investing
Sembcorp's renewables prospects earn 'buy' calls
Sembcorp Industries' performance as a renewables player is helping the company to attract attention from analysts.
Goldman Sachs has just initiated coverage on the Singapore-listed stock with a 'buy' recommendation and a target price of S$8.40, representing a premium of 28 per cent above the May 13 closing price of S$6.57.
DBS also has a 'buy' call on the stock, and HSBC has picked it as a top defensive play amid US tariffs.
Sembcorp, whose net profit rose 7 per cent in 2024 to S$1 billion, has a diversified portfolio, which the analysts like. That diversification allows Sembcorp to buffer headwinds in China, where increasing curtailment – forced reductions in power generation due to oversupply – has hit returns. At the same time, Sembcorp is in markets with favourable dynamics such as India, the Middle East, the Philippines and the United Kingdom, Goldman Sachs says. At home, Sembcorp also holds a strong position in the Singapore power generation and natural gas import markets.
The growth is supported by expectations of stable income due to long-term power purchase agreements. The analysts estimate that about 70 per cent of profits in the next few years could come from fixed-return contracts.
To further sweeten the pie, there is potential for one-off gains from selling assets given that capital recycling is a stated strategy for Sembcorp.
Investors in Sembcorp have done well so far this year. As at end-April, Sembcorp shares gained 19.6 per cent, outperforming a 1.2 per cent increase in the Straits Times Index over the same period.
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