In recent years, climate-focused financing has seen significant growth, driven by heightened global awareness of climate change and the commitment to meet the targets of the Paris Agreement. According to the United Nations Framework Convention on Climate Change (UNFCCC), global climate finance flow surged by nearly 12% between 2018 and 2020, reaching an impressive annual average of around USD 800 billion¹. This upward trend is expected to continue as COP28, scheduled to occur this month in Dubai, United Arab Emirates, will focus on accelerating climate action and re-aligning climate action plans to reduce emissions by 43% by 2030². 

The South and Southeast Asia (S/SEA) region is particularly vulnerable due to its heavy reliance on climate-sensitive sectors such as agriculture, fisheries, forestry, and tourism. Depending on the region, 20-60% of the total workforce in each country relies solely on these sectors. Environmental, social, and governance (ESG) has become an essential requirement of stakeholders, such as limited partnerships, regulatory bodies, etc. It is now crucial for companies to adopt a “climate lens,” which can fall under the environmental aspect of ESG, in order to stay competitive.

What toolkit does an investor use to identify these opportunities?

To identify climate-related investment opportunities, investors employ a strategy known as “climate lens investing.” Climate lens investing evaluates investments based on their alignment with climate goals, such as greenhouse gas (GHG) emissions reduction, adoption of energy-efficient and clean technologies, and mitigation of environmental risks using climate assessment toolkits and key performance indicators.

According to the International Institute for Impact and Infrastructure Capital (IIIC), climate lens investing strategies can take various forms:

• Exclusion or negative screening: This approach involves filtering out or avoiding investments in businesses with negative ESG impacts. For instance, FMO, the Dutch development bank, has announced its decision to cease direct investments in fossil fuels across markets, including S/SEA, unless they meet stringent technical criteria.
• Transitioning: Investors can support businesses transitioning toward climate-conscious and responsible practices. For example, the Asian Development Bank (ADB) provided a sustainability-linked loan to PT Dharma Satya Nusantara in Indonesia, an agroforestry company. The loan aims to expand sustainable wood processing, promote rural development, and implement energy-efficient and water resource conservation processes in Java, Indonesia.
• Climate solutions: Investing in business models that mitigate climate change risks through their products or services. For example, the International Finance Corporation (IFC) invested in NSL Renewable Energies, an Indian independent power producer. This investment will support the development of wind and hydropower projects, expanding access to clean energy in the country.

What are their sectoral priorities in the S/SEA region?

In S/SEA, climate capital tends to focus on key thematic areas such as clean energy, sustainable agriculture and forestry, water and waste management, and energy efficiency.

• Clean energy: S/SEA countries heavily rely on fossil fuels for their basic power generation needs; for instance, in Indonesia,  about 60% of its energy needs are met by coal³. As these countries undergo an energy transition, the demand for clean energy solutions also increases, making the changeover a high-potential investment opportunity for investors. Some examples of companies in this sector include mini-grids, solar rooftops, and biogas generators.

• Sustainable agriculture and forestry: Given S/SEA’s heavy dependence on the agriculture, forestry, and fishery sectors, investments in businesses promoting sustainable and climate-smart agriculture or enhancing its productivity are essential for building resilience. Accordingly, investments in technology, such as solar irrigation facilities, solar refrigerators, or biofertilizer manufacturers, could greatly enhance the resilience of these sectors. 
• Water and waste management: Rapid population growth and urbanization have put major stress on Asia’s freshwater reserves. As of 2020, South Asia’s freshwater per capita reserves amounted to just 1,063 cubic meters, which is far below the world average of 5,499 cubic meters⁴. Effective water usage and waste management practices can significantly reduce resource utilization and promote a sustainable economy. Examples of such business models could include wastewater recycling facilities and waste-to-fertilizer conversion facilities.
• Energy efficiency: Asia accounts for approximately 50% of global emissions, with India alone contributing to nearly 7%⁵ of the total. Moreover, global energy prices have risen by nearly 26%, and the Asia-Pacific region is projected to experience up to a 27% increase by 2025⁶. Business models such as smart metering systems can not only reduce carbon footprints but also bring significant cost savings.

What additional steps can businesses take to increase their chances of securing climate capital?

For entrepreneurs seeking to attract climate financing, here are some essential steps to consider:

• Track and report climate impact and craft a climate impact strategy: When considering investments, impact-driven investors often use these indicators to assess the company. Establishing robust monitoring and reporting mechanisms can help track and communicate the environmental impact of your business. Demonstrating measurable outcomes, such as reductions in GHG emissions, energy savings, or positive social impacts, enhances credibility and increases the chances of securing climate finance.
• Approach the right financiers: Investors typically have different kinds of mandates, so it is essential to identify and approach financiers that align with the company’s stage of maturity, investment type and amount, impact focus, and return potential. The capital map below provides a great starting point for identifying the right investors. 

• Leverage climate funding, grants, and platforms: Leveraging available climate-focused resources can enhance the bankability of a business as well as support its expansion. For example, donor-funded programs like Water and Energy for Food (WE4F) through its S/SEA Regional Innovation Hub, provides financial support, technical assistance, and investment facilitation to water-food, energy-food, and water-energy-food innovations. So far it has facilitated over $28 million⁷ investments into 10+ SMEs in SSEA.

Case Study: Argos recently raised $2.7M for their pre-series A round from impact investors

Founded in 2019, Agros is a climate enterprise that supplies solar-powered irrigation systems to farming communities in Myanmar and Cambodia. Their products help small and middle-sized farmers improve their livelihoods while decreasing their carbon footprint by tackling major problems such as high fuel dependency and soil degradation. As of March 2023, they have increased farmer’s profits by at least US$1,5000,000 and avoided up to 5,000 Tons of CO2 emissions⁸. 

In November 2022, the company received the credit facility from an impact investment fund managed by Nexus for Development, the Pioneer Facility, to finance its inventory and working capital needs in two countries⁹. To further expand its operations, the company kicked off the pre-Series A funding round targeting both existing and new identified mission-aligned early-stage investors, in which the round saw participations from Gaia Impact Fund and Schneider Electric Energy Access Asia who have a strong focus on the agri-tech and clean energy sectors and align with Agros’ missions. With the help of this investment, Agros hopes to expand its product lines and services to become the go-to sustainable agriculture platform for farmers across Asia.

Footnotes

1. UNFCC Standing Committee on Finance: Fifth Biennial Assessment and Overview Report, UNFCCC, 2022
2. Dr. Sultan Al Jaber, COP28 President-Designate, UNFCCC, 2023
3. Enhancing Indonesia’s Power System Report, International Energy Agency (IEA), 2022
4. Renewable internal freshwater resources per capita, The World Bank Data
5. Global Carbon Budget Report, ESSD Copernicus, 2022
6. Asian Development Blog: Why are Energy Prices High and How Can They be Reduced?, ADB, June 2022
7. Investment data is collected as of May 2023
8. Agros nets $2.7M to scale sustainable farming solutions
9. Pioneer Facility invests in Agros to expand solar irrigation access for smallholder farmers