Domestic Capital Mobilization for Climate Finance in Southeast Asia

Convergence: Ayesha Bery, Ishwari Sawant. Climate Policy Initiative: Joyce Jiahui Lin, Rosaly Byrd, Vivian Wijaya.

Improving the Enabling Environment for Local Capital Towards Climate Action in Indonesia, the Philippines, and Vietnam

Mobilizing local capital is an essential component of effective and sustainable climate finance. As the global climate finance gap continues to widen, relying solely on international funding sources is no longer sufficient to meet the scale of investment required for climate mitigation and adaptation. Global reductions in official development assistance (ODA) and macroeconomic volatility are contributing to reduced cross-border flows, making the traditional sources of capital underpinning climate finance at risk of declining. In this context, maximizing local investment is critical.

Local capital from domestic public budgets, private sector actors, and financial institutions can play a catalytic role in bridging this gap. Increasing local investment towards climate finance can bring distinct advantages:

Local actors have a deeper understanding of the local investment landscapes and can align climate finance with more long-term objectives and local needs,
Local actors invest in local currency, reducing the need for hedging costs, and
Local actors can build a track record and create a demonstration effect for others to invest in climate-aligned sectors.

Key findings

Overall climate finance and blended climate finance trends in the region

Most Southeast Asian countries continue to rely heavily on international capital, with the exception of Vietnam and Singapore, with higher levels of domestic climate finance flows. Participation of local financial institutions remains limited in the region.

Climate Policy Initiative (CPI) tracked USD 142.5 billion in total climate finance flows to ten Southeast Asian countries between 2017 and 2022 (CPI 2024a).

Participation from domestic investors in blended finance deals remains very low, just 5% of total investment commitments, mirroring broader trends in climate finance where international capital plays a dominant role.

Blended finance flows to Southeast Asia by investor domicile

Domestic capital mobilization and the enabling environment

The most active local investors in climate finance across all three countries are corporates, reflecting the important role of domestic project sponsors in the energy sector. However, there is limited diversity among these actors; climate finance activity is largely concentrated among well-capitalized corporates, often subsidiaries of large conglomerates, rather than a broad range of domestic firms.

Institutional investors and domestic financial institutions play a limited role.

Financing for climate mitigation exceeds that for climate adaptation across all three countries, though the Philippines has been the most intentional on catalyzing adaptation financing.

Vietnam and the Philippines have had limited government-led blended finance programs. While Indonesia has had higher levels of government-led programs, the country presents the most challenging policy environment for the energy transition, which also allows it to have the greatest potential to strengthen this policy environment. Meanwhile, Vietnam’s high levels of local financing for climate finance showcase the role of a strong enabling environment for renewable energy investments.

Opportunities for domestic climate finance in Vietnam, Indonesia, and the Philippines

Based on a detailed analysis of each country’s enabling environments, various opportunities were identified for increased domestic capital mobilization in Indonesia, the Philippines, and Vietnam. The report emphasizes the critical role that blended finance can play in enhancing financial additionality and addressing market failures to ultimately encourage local investment into climate action.

Blended finance can play a catalytic role in scaling local investments in nature-based solutions (NbS) and carbon markets by de-risking projects, leveraging private capital, and reducing high upfront costs associated with new climate sectors such as electric vehicle (EV) infrastructure.
Blended finance and technical assistance can encourage local financial institutions and institutional investors to participate in large-scale energy project finance while also building their capacity to invest in the space.
Strong presence of regional MDBs, DFIs, and multi-donor funds can create demonstration effects for local private actors.
Guarantees are a valuable tool to address the tenor constraints faced by local financial institutions and institutional investors, encouraging more participation from these players at the local level.
Green bonds present a significant opportunity across the three countries to mobilize local investment, including alongside global investors. Meanwhile, green finance taxonomies are a foundational step for standardization that can encourage more domestic investments into climate finance.

Regions:

Asia-Pacific

Sectors:

Multi-sector