Will concessional capital accelerate Asia’s energy transition?
Its success will depend on de-risking and crowding in private investment
“One in every seven tonnes of greenhouse gas emitted into the atmosphere comes from a coal plant in Asia”, warned Gillian Tan, chief sustainability officer at the Monetary Authority of Singapore (MAS) at the New York Climate Week. Speaking at an event co-hosted by MAS and the World Bank, Tan outlined the challenge at hand – Asia’s decarbonisation needs new financing tools to accelerate its pace.
One such tool is concessional capital– a range of flexible, high-risk, low-return financing mechanisms with rates below what capital markets expect. These mechanisms can vary in their design, ranging from a long-tenure loans at below market interest rates to equity or infrastructure investing with a higher than average risk appetite.
Temasek, a Singaporean state-owned investment company, is going down the concessional capital path for the first time. On September 23, at the company’s 50th anniversary dinner, Temasek’s chairman Lim Boon Heng announced a S$100 m concessional capital commitment.
The idea behind the commitment, the company says, is to finance marginally bankable projects that Asia’s energy transition depends on. So why are these projects marginally bankable and how will concessional capital address the issue?
De-risking
Asia’s energy transition is facing a financing gap. Of the $1.1trn the region needs annually to invest in mitigation and adaptation, it only receives $333bn – mostly through green bonds or public investment.
Unlocking additional sources of finance requires a deeper understanding of why some projects might be considered high risk. Kyung Ah Park, who leads Temasek's sustainability and ESG efforts outlines why Asia’s infrastructure projects face financing hurdles:
“Firstly, some of the projects are quite small. That makes trying to use an aggregation model actually quite important because for many financiers and investors, working on a $10m deal almost takes a similar amount of resourcing and effort as $1 bn deal. That means they can make much more in terms of fees in the $1 bn deal”, Park told Net Zero Investor.
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In addition to scale, construction risk plays a vital role. Investors’ unwillingness to take on such risks, provides concessional capital with a powerful reason d’etre: de-risking.
Citing the case of Pentagreen, a joint debt financing venture between HSBC and Temasek aimed at sustainable infrastructure across Asia, Park added:
“Many investors are reluctant to take certain risks like construction risk. So being able to take some of the construction risk alongside existing projects is a way for Pentagreen to be able to lean in and unlock more senior capital”.
Precedent
As Temasek steps into concessional capital territory, there is much to be learnt from the experience of multilateral development banks – which have operated in this space for several years.
Six such banks, including the Asian Development Bank, set up two concessional capital funds, totalling $8bn back in 2008 aimed at “low-cost, large-scale and long-term” investments in climate solutions.
Between 2008 and 2017, one of the funds (CTF) played a key role in accelerating Thailand’s renewable energy investments. At the time, Thai commercial banks were unwilling to extend more than 30-40% of project costs owing to inexperience in renewable energy project valuations. When the CTF stepped in, debt-equity ratios of the projects became more attractive. Of the $5bn invested in Thai solar projects during this period, $122m was follow-on capital unlocked by a $141m CTF investment.
Crowding in
The CTF’s experience in Thailand speaks to another tenet of successfully deploying concessional capital – blending it with private capital. Ultimately, the goal is to make the asset’s investment thesis more attractive to private capital.
Several concessional finance projects have been aimed at crowding in and blending private capital. In April 2023, the South Korean government, for the first time in the country’s history, contributed to a $10m blended concessional climate finance facility with the International Finance Corporation. At the time, the country’s deputy prime minister and minister for economy and finance Kyungho Choo commented:
“We anticipate that our contribution to blended finance will also scale up investments and accelerate development efforts in challenging markets where it otherwise would not go”.
For Temasek, the goal behind the S$100m concessional capital commitment is similar.
“Ideally what we want to do with this capital is to be able to turbocharge and have a multiplier effect. If you deploy concessional capital well, on average, there's about four to five times the amount of mainstream capital on top. In some cases it can be even bigger than that”, says Park.
Ultimately however, this is unlikely to be a silver bullet. “Concessional capital is certainly a key tool, but it cannot be our only tool”, said Tan as she concluded her remarks at the New York Climate Week. Tan’s vision for Asia’s decarbonisation has many moving parts – blended finance, restructured power purchase agreements and insurance arrangements all have a role to play.
Temasek’s announcement of concessional capital speaks to a wider conversation over why Asia’s energy transition faces financing gaps. Concessional capital could play a critical role in potentially bridging such gaps. Its success in doing so is hugely consequential for the global battle for net zero emissions, which all evidence suggests, will be won or lost in Asia.
Temasek pledges S$100m concessional capital to climate action
