For Yulanda Chung, head of sustainability, institutional banking group, at DBS, the pursuit of transition finance agenda in Asia has limited downside risk. “I see only upside and this is the view of many companies as well,” she tells The Asset. “They are willing to invest relatively long-term, participating in project finance transactions with tenors of 10 to 15 years. For example, green hydrogen, ammonia and other alternative fuel production projects would take into account that sort of timeframe. Whether it is on a global or regional level, we are all moving in the same direction. Southeast Asia may have a slower pace in achieving its target, but we all want net zero to happen.”
For investors and for project developers, what is most important is clarity and certainty in the regulatory environment for them to invest billions of dollars into projects and to be assured there will be demand at the end of it. All these pieces of the puzzle have come together and will play a big part in transition finance.
Transparency is key for investors to determine whether what they are buying into fits their investment mandate. If it is a sustainability-linked bond with greenhouse gas emission reduction as a key performance indicator (KPI), how ambitious is that target, how is it benchmarked against a certain pathway and what is that pathway?
Emerging economies such as Southeast Asia and many of DBS’ core markets need a different kind of understanding of the pace of transition finance. Chung explains: “We have to acknowledge that companies in the mining and automobile industries, for instance, need to continue their reliance on fossil fuels within a certain time horizon before they are able to transition. It is important to have the transition label because we knew the pool of capital allocated for sustainable development purposes is growing bigger. We want companies that needed capital to transition to avail that.”
Within Asia itself, the target to achieve net zero varies among countries. China announced in September 2020 to achieve carbon neutrality by 2060, while Indonesia is committed to achieve net-zero emissions by 2060 or earlier. India, on the other hand, aims to reach its net-zero target by 2070. “The fact the net-zero targets among different countries are set in different years indicate that we may have to accept a longer reliance on fossil fuels in emerging economies in the region and that trickles down to the clients of the banks,” Chung points out. “Energy transition, in particular, will take a longer time to happen in Southeast Asia than the rest of the world, reflecting the national climate pledges.”
Chung continues: “When we went out to engage with our customers, we’ve found out that many of them are receptive to the idea that the pace of transition for emerging economies should be different from the developed markets. Now it is even more pronounced that the European Union (EU) regulations have ramifications for our companies in this part of the world. For instance, Asian companies in certain industries exporting to the EU will be subjected to carbon border adjustment mechanism (CBAM) commencing in 2026, and there is an EU directive on deforestation that affects agricultural commodity companies exporting to the bloc.”
CBAM is a carbon tariff on carbon-intensive products such as cement, iron and steel, aluminium and fertilizers imported by EU. This is a tool to fight carbon leakage, ensuring that the EU’s climate policies are not undermined by production relocating to countries with less ambitious green standards or by the replacement of EU products by more carbon-intensive imports.
DBS is currently working on an energy transition mechanism (ETM) project, which it is executing as financial adviser to sovereign wealth fund Indonesia Investment Authority (INA). It involves the 660-megawatt Cirebon 1 coal-fired power plant, which will be retired earlier than planned as stipulated in the power purchase agreement (PPA). ETM is committed to accelerating the retirement or repurposing of coal-fired power plants and replacing them with alternative clean energy.
The project initially generated lukewarm response from the industry. “When we first approached the commercial banks and potential lenders for this project, many of them flat-out said ‘no’ because they have a public commitment not to finance coal-related projects,” notes Chung. “Many of them also have net-zero targets for their power portfolio and if they undertake an ETM transaction, that would mean taking on the emissions coming from the coal power plants into their portfolio, which will totally bust their carbon budget. So many of them rejected participating in the project.”
Then the B20 meeting and the G20 summit happened in Indonesia in November last year, and the country came up very strongly advocating for Just Energy Transition Partnership (JETP), a government-to-government energy transition partnership with retiring coal power plants at the heart of it – and in the process generated a lot of support from several countries. Others expressed willingness to consider participating in the project – even though it will add emissions into their portfolio – since it will effect change in the real economy. “It’s been fascinating how attitudes changed in the finance industry towards this project,” says Chung.
Initiating the ETM project in Indonesia involves coal power plant owners and operators renegotiating their PPA with the offtaker state-owned Perusahaan Listrik Negara (PLN), which has the monopoly of electric power distribution in Indonesia, to secure a transition pathway that is less disruptive. “We want to be able to reduce the number of operational years of the coal power plants as determined by the PPA by at least five years or so,” adds Chung.
Demonstrating its commitment to transition finance, Bank DBS Indonesia in April last year provided energy transition financing to PT Jaya Bumi Paser (JBP), a subsidiary of Indika Energy, amounting to US$27.5 million. The funds were used to finance the development of new and renewable sustainable biomass fuels that comply with the Forest Stewardship Council (FSC) standards in East Kalimantan. This is in line with Indika Energy’s commitment to encouraging investment in energy transition and supporting efforts to reduce national emission by 29% on own efforts or by 41% with international assistance by 2030, as stated in the Nationally Determined Contribution (NDC) document.
Indika Energy is committed to achieving carbon neutrality by 2050 through sustainability initiatives in its operations, including zeroing in on the ESG aspects. It is also committed to increasing the non-coal sector’s contribution to total revenue to 50% by 2025.
Then in July, also of last year, DBS concluded its first transition use-of-proceeds loan to China with Chinalco Financial Leasing amounting to US$50 million – representing the bank’s first transition use of proceeds loan in China. The one-year loan also marked DBS and Chinalco’s partnership to enable the transition of the metals and mining industry. Chinalco has set a target to achieve peak carbon emissions before 2025 and reduce emissions by 40% by 2035. The company has a decarbonization plan to actively develop new energy projects such as wind power and photovoltaic to adjust its energy consumption structure.