Southeast Asia has a key role in the global energy transition, provided it can attract the foreign investment needed to exploit its abundance of renewable resources and manufacturing potential.
Southeast Asian governments are setting goals to encourage the shift to renewable energy: Six Southeast Asian countries have announced targets for net-zero emissions and carbon neutrality.
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.
Technological advances and a political push towards sustainability drive a global transition from fossil fuels to renewable energy.
Southeast Asia could play a crucial role in that transition. A vital link in the global manufacturing chain, the 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.
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. Critically, fossil fuels are expected to meet three-quarters of the increase in energy demand, leading to a nearly 35% increase in CO2 emissions.
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The reliance on fossil fuels is unsurprising, given that Southeast Asia possesses these abundant resources. Fortunately, the region is also well endowed with renewable energy resources such as hydro, solar and geothermal power — and wind power in some places, such as Vietnam.
Green ambitions
Governments across the region are setting goals to encourage the shift to renewable energy: Six Southeast Asian countries have announced targets for net-zero emissions and carbon neutrality. Environmental, social, and governance (ESG) adoption has recently accelerated 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.
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It is important to recognise, however, that Southeast Asia is a highly diverse region. Manufacturing capability, for example, varies widely. Thailand aims 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 and 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. The Philippines and Vietnam also attract large investments in EV production facilities and could become major players.
Natural advantages
The region has abundant 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 2,000 kg of nickel. The metal is a critical ingredient in the batteries that power EVs. Meanwhile, Indonesia and Myanmar are the second and third largest tin producers, which is essential in making solar panels. Myanmar accounts for 13% of global production of the rare earth elements used in EVs and solar cells.
Attracting FDI in the new technologies underlying wind and other renewable energies is vital if the region is to become a manufacturing powerhouse supporting the transition. But that is difficult because every country wants to become a leader in this field, and there is a reluctance to share intellectual property.
Winning investment in renewables production is also critical if the region reaches Asean’s target of generating 23% of the primary energy supply from renewables by 2025. That would require US$27 billion ($x billion) of investment yearly, yet the Asean countries attracted no more than US$8 billion annually from 2016 to 2021.
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.
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Take Vietnam, which has experienced an unprecedented boom in solar energy investment in recent years. Its solar capacity grew 200- fold from 85MW in 2017 to nearly 17,000MW in 2021. 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”. 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. 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 grows. The Yusof Ishak Institute (formerly the Institute of Southeast Asian Studies) in Singapore certainly thinks so. It has argued: “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 gave a much bigger say to its youth [who tend to be most concerned about ESG issues] in future national polls.”
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 social and governance aspects. It notes that Southeast Asian countries are among the most exposed to threats from climate change, such as extreme weather events.
According to the International Finance Corporation, corporate governance has markedly improved in many countries. The “S” pillar has received the least attention from investors and analysts, mainly due to a lack of public information. 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.
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. According to the World Economic Forum, 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.
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.
Sam Chan is an equity research analyst at Pictet Wealth Management
