A report from Boston Consulting Group (BCG) and the Global Finance Markets Association (GFMA), Climate Finance Markets and the Real Economy, describes an annual financing need and opportunity of a significant US$3 trillion to $5 trillion for financial institutions in the coming years.

The BCG and GFMA report features proprietary analysis of the climate finance market and 10 economic sectors that account for 75 percent of global greenhouse gas (GHG) emissions. The report, commissioned and produced in collaboration with 13 global banking and capital markets firms, is based on interviews with more than 100 market participants from a range of corporate sectors, banks, asset owners and managers, multilateral organizations, financial regulators and other key market enablers.

Green financing opportunity

This global shift unlocks a substantial financing opportunity that is essential to meeting the commitments of the Paris Agreement on climate change.

The combined financing requirement for this global climate pathway is between $100 trillion and $150 trillion over the next three decades. Climate finance will need to scale across all asset classes, with financing raised across a range of instruments at an estimated range of 35 percent in equity, 44 percent in loans and 21 percent in bonds.

This will require rapid scale in asset classes such as equity, structured finance and bank intermediated lending, while at the same time connecting climate-related metrics and outcomes to key market activities such as derivatives and securities lending.

Such a seismic shift will not only provide a valuable opportunity for banking and capital markets to steer positive change, but also create new revenue opportunities.

Climate finance across debt and equity capital markets, syndicated and bilateral lending, as well as project finance, structured products, derivatives and securities finance, represents an estimated global revenue pool of more than $25 billion annually over the next decade.

Leading global banking and capital markets firms will play critical roles as lenders, book runners, arrangers, asset managers and investors. These stakeholders have stated a combined ambition to add $250 million to $1 billion to their revenue pools through to 2030.

Asia’s significant investment needs

The BCG and GFMA report reveals that Asia’s rapid growth will generate the greatest need for financing, estimated at $66 trillion or approximately 55 percent of the global total. This is driven by the scale and pace of the region’s economic growth, expanding populations, increasing urbanization and rapid industrialization.

Loans are likely to form the greatest investment need in the region at almost half (47 percent) of Asia’s climate-positive investment needs. Equity (37 percent) and bonds (16 percent) will make up the remaining shortfall.

Power, responsible for about 30 percent of total global emissions, will require about $59 trillion in transformation investment, with over half ($34.3 trillion) of that global investment concentrated in Asia. The region’s cement industry will require another $1 trillion, aviation $2 trillion, light road transport $1.6 trillion and heavy road transport $9.9 trillion, with the greatest global share of investment needs by sector all focused in Asia. Chemicals, shipping, agriculture, iron and steel, and buildings are all sectors that echo this trend.

Indonesia’s vital involvement

Indonesia is Southeast Asia’s largest economy and the fourth most populous nation in the world. While its financial industry is still relatively underdeveloped compared to regional neighbors such as Singapore, its influence and market activity is likely to grow significantly in coming years.

Domestic choices will also have a major influence on intraregional and foreign capital flows into critical areas of climate consideration, with particular impact in industries such as power and energy, agriculture and forestry, and land use.

There have been some encouraging recent steps in Indonesia’s financial industry. 2020 represented the first year that the Financial Services Authority (OJK) required banks to file business sustainability reports assessing an institution’s financial, social and environmental sustainability as a key part of their operations. This is part of the obligations under the wider OJK Regulation No. 51/POJK.03/2017 on Implementation of Sustainable Finance for Financial Service Institutions, Issuers and Public Companies, which provides a welcome framework for climate-positive financial decisions.

Recent years have also seen pioneering green financing products emerging in Indonesia. In 2018, Bank OCBC NISP was the first commercial bank to issue green bonds for climate projects in Indonesia. Bank Rakyat Indonesia (BRI) followed by issuing $500 million in its own Global Sustainability Bond in 2019, with more institutions soon expected to follow.

Overcoming climate capital challenges

It is clear that meeting these significant investment needs will not be without challenges.

Establishing and aligning taxonomic definitions and regulatory frameworks represent another key challenge. Aligning definitions and principles will be critical in assessing the climate positive value of a potential investment, reducing transaction costs and steering capital flows in the most impactful way.

This alignment reflects another difficulty around reporting and how companies maintain existing financial reporting standards alongside more long-term climate-related reporting.

What will it take to win in this space?

The global energy transition reflects a growing pressure and opportunity for green financing. In navigating this transition, we have identified 10 key actions for banks and capital market firms to undertake:

1. Partner with and support your clients as a strategic advisor to help them navigate the climate transition landscape and transition pathways;
2. Mobilize new sources of patient, high-risk capital to meet the transition needs of your clients, while partnering with research labs to foster climate-focused innovation companies;
3. Develop appropriate products and deploy capital aligned with climate transition finance (not limited to green only);
4. Refresh your sector and client strategy through a climate lens;
5. Mobilize collaboration with the public sector, social sector and standard-setting bodies;
6. Scale the use of pooling and securitization while developing suitable derivative markets;
7. Establish a robust product suite and market for derivatives and structured products;
8. Integrate climate into risk management and move towards quantitative assessments;
9. Build a robust climate data and technology platform to support strategic decision making; and
10. Embed climate risk management into your governance framework and operating model.

Climate financing is set to become a $100 trillion to $150 trillion market over the next three decades. At the same time, external pricing factors such as carbon prices will increasingly influence investment decisions.

It is vital that Indonesia continues to evolve and embrace this transition, with recent efforts revealing welcome green shoots that hint at a more deep-rooted sustainable finance focus in years to come.

***

Dave Sivaprasad is managing director & partner, Southeast Asia leader for climate action at Boston Consulting Group (BCG)

Ernest Saudjana is managing director & partner, Southeast Asia leader for financial institutions at BCG

Tushar Agarwal is partner at BCG

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