Demystifying ClimateTech Investment in the Context of Southeast Asia — Part 2
I published Part 1 of my 3-part series on ClimateTech in Southeast Asia (SEA) before 2021 came to a close and I am energized by the feedback. I believe such conversations will only promote more knowledge sharing and support for the start-up community. As a recap, Part 1 was to provide an overall understanding of sustainability and the global ClimateTech ecosystem. In this Part 2, I will begin by sharing the — perhaps dreary — picture of the climate issues in SEA and then discuss the positive developments as well as potential climate-related solutions.
Southeast Asia Faces Unprecedented Climate Circumstances
From an economic growth perspective, SEA is arguably punching well above its weight. There is significant growth in both the regional economy and population over the last few decades. Although the COVID-19 pandemic has been challenging, the region has remained largely resilient. Recently, Morgan Stanley raised its Southeast Asia gross domestic product (GDP) projection to 5.6% in 2022, up from 5.4% before, with the regional bloc outpacing the overall Asia forecast of 5.4% [1]. Not only is the SEA population expected to continue growing, household income continues to rise and consumers are also becoming more educated and sophisticated [2].
However, while the SEA region has been progressing on a range of development goals — including poverty reduction, health and education — the not-so-good news is that this region is one of the most at-risk regions in the world in terms of its impact on climate change. The reasons for this are summarized below, for example, the rapid growth and urbanization has implications on the increased usage of energy, which is mostly powered by coal.
The unique set of climate related challenges facing SEA may be summarized below.
Urbanization — By 2050, the majority (65%) of the population will be living in urban areas, compared to only 47% in 2015. The region sees rapid urbanization, at a staggering rate of 5 million people moving to urban areas every year. This movement will apply not only to Tier 1 cities like Jakarta, Manila and Ho Chi Minh City, which are highly developed and have dense populations, but also other emerging cities such as Surabaya, Pampanga and Can Tho [3].
Energy Consumption — SEA’s growth in electricity demand is one of the fastest-growing regions in the world. Driven by the growing ownership of household appliances and air conditioners, as well as increasing consumption of goods and services in general, demand has grown by more than 6% annually over the past 20 years on average [4]. The region’s overall energy demand is expected to continue to grow — by another whopping 60% by 2040 [5].
A worrying trend is that the region’s coal usage has more than doubled from 158 million tons in 2010 to 331 million tons in 2019 [6].
At present, the use of conventional energy is still more cost efficient compared to Renewable Energy (RE) technologies [7]. Driven by the focus on economic growth, rapidly growing population, increasing rate of urbanization and significant foreign investments supporting coal projects, SEA is one of the few areas in the world where coal usage has actually increased in the last decade [8].
Impact of Extreme Weathers on Livelihoods — Currently in SEA, over 75 million people reside on low-lying land, less than 5 meters above sea level. By 2050, 92% of them will become climate immigrants, who will be forced to move from their homes due to extreme weather. 12% of the population will be forced to move due to rising sea levels, which is more than twice the global average of 5% [9].
Rising temperatures would adversely affect agricultural output and overall economic productivity. Climate change could potentially cost the region 35% of its entire GDP by 2050 [10]. In 2021 itself, more than 57 million people in the Asia-Pacific region were severely affected by climate related disasters. Disasters such as floods, typhoons, heat waves and cold waves have been increasing in frequency and intensity.
For example, in November 2021, over 1 million people in Indonesia were affected by floods whilst parts of Vietnam and the Philippines are still recovering from floods and super typhoons that occurred in 2020 [11].
Biodiversity and Deforestation — Whilst climate change may have devastating impacts on human life, we are not the only species affected by it. The region is home to 20% of the world’s plant, animal and marine species. Deforestation is a major threat to these, and is the highest in SEA among any major tropical region in the world, losing 1.2% of forest annually [12]. This is driven largely by the increase in palm oil, rubber and wood pulp plantations which occupy previously forested land.
Southeast Asia’s GHG Emission — SEA greenhouse gas emissions grew at a CAGR of 1.5% between 2000 and 2016. While the rate of growth is not as high as some markets such as India (4.2%) and China (6.4%), it is still higher than many other regions that have even seen falling emissions in the same timeframe [13]. As a region, the largest contributor to GHG emissions is land use change, forestry and agriculture. The highest growth in GHG emissions, however, come from manufacturing and industrial processes, energy use and transport.
In order to address the impacts of climate change meaningfully, experts believe that the only solution is for SEA to aggressively pursue sustainable transformation and decarbonization across its economic sectors. This includes shifting away from excessive resource extraction for energy consumption to renewable and alternative fuels, promoting sustainable agriculture, improving efficiencies in supply chains, reimagining urban areas and transportation, as well as establishing a forward-looking financial system to support green and sustainable growth.
Rising Awareness and Efforts towards Climate Issues
Despite a slow start and while there is still a long way to go, I am glad to share that the SEA ecosystem stakeholders are now becoming more conscious about climate related considerations and are also taking concrete actions towards this cause. I am positive that it is still not too late for us to impact real change.
Collective Will at National and Regional Levels
Recognizing the potential risks and consequences of climate change inactions, the member states of The Association of Southeast Asian Nations (ASEAN) have taken steps to develop medium to long-term plans that acknowledge the region’s climate change vulnerability and identify necessary adaptation priorities, including Nationally Determined Contributions (NDCs) commitments and the supporting national policies and measures to meet the NDC targets. In conjunction with the recent COP26, several countries have even submitted more aggressive NDC targets or announced further policy enhancements in this aspect. For example, it’s encouraging that Singapore has committed to phase out unabated coal (coal burned without carbon capture and storage) by 2050 as part of the Powering Past Coal Alliance (PPCA) at COP 26 [14].
Beyond the national level, ASEAN member states have also expressed collective will and aspirations to achieve regional resilience through collaborative action. As a bloc, ASEAN has set a target to source 23% of its energy from renewable sources by 2025, and to reduce energy intensity (energy consumption per unit of GDP) by a noteworthy 30% by 2025, from 2005 levels.
Another notable ASEAN cooperation on climate change is the culmination of all regional climate change ambitions in the form of the ASEAN Socio-Cultural Community (ASCC) Blueprint 2025, under which various efforts such as information exchange through workshops and conferences, as well as implementation of specific projects to address targeted issues have been implemented. For more information about the NDC commitments by country and the current status of ASEAN national and regional actions, refer to the ASEAN State of Climate Change Report here and the NDC Tracker by ClimateWatch here.
Rising Private Sector Awareness
Beyond the public sector, the private sector stakeholders are also making progress in their sustainability efforts. Stock exchanges from all key Southeast Asian economies — Singapore, Malaysia, Thailand, Vietnam, Indonesia, and the Philippines — are part of the Sustainable Stock Exchanges Initiative, a UN project that aims to promote corporate investment in sustainable development and requires issuers to provide ESG disclosures [15]. Additionally, regional enterprises are also being recognized globally for their efforts towards sustainability — City Development Limited, CapitaLand and Starhub were amongst the top 100 global most sustainable companies named by business and society publication Corporate Knights in 2021 [16].
Also, the region is also experiencing rising consumerism with sustainability mindset amongst the individuals. According to a study by the World Economic Forum (WEF) of 1,740 SEA households, a surprising high 80% of consumers value sustainability and have made lifestyle changes to be more eco-friendly, and this number increases to 90% among the urban affluent — though it is worth noting that this statistic is not consistent across all countries [17].
Turning Challenge into Opportunity
“It is often said that the greater the challenge, the greater the opportunity for growth.”
As an emerging market, much of the needed infrastructure and industry processes are still being developed across Southeast Asia. Thus, from the economic standpoint, a silver lining against this backdrop is that the region has the opportunity to tap on a variety of business and technological innovations to continue growing sustainably. Bain & Company believes that in developing its green economy, Southeast Asian economies could experience up to US$1 trillion in annual economic opportunities by 2030, with the potential to create up to 6 million new jobs and 20 new Fortune 500 companies [18].
“As far as the climate innovation ecosystem is concerned, there may never have been a more exciting time than now.”
A decade ago, when the world was beginning to understand the challenges of energy transition, the innovation ecosystem was still too nascent — it was lacking in:
- Investable startups
- Market awareness and adoption
- Venture capital and private equity capital and
- Successful exits [19] that would add as drivers for more private investments
Since then, there appears to be some optimism that both the technology and the innovation ecosystem have matured somewhat. What used to be only good as an outstanding research concept now have a much better chance of getting commercialized and adopted globally. Globally, private equity and venture capital investors begin to see immense potential in this space. In the first three quarters of 2021, despite the pandemic, a whopping $30.8B has been invested in ClimateTech startups globally — 30% higher than all of 2020 [20].
Closer to home, while the Southeast Asian innovation ecosystem may still be considered young and nascent globally, history has shown us that our region is special and unique with its own blend of market circumstances and sentiments. Regional native startups that leverage innovative business models and technologies to differentiate have the opportunity to make a difference, be it in relation to energy, manufacturing, agriculture, transport or otherwise. As such, for investors who have an interest in the Southeast Asia region, the momentum around ClimateTech innovations go beyond being a global phenomenon for which we are simply observers. Instead, it is a real opportunity for us to back and build home-grown ClimateTech startups to become regional and global champions in this genre. At Vertex Ventures, we look forward to backing and grooming ClimateTech startups into global champions.
What’s Next?
In Part 1, I focused on clarifying the basic concepts and jargons around climate change and summarized the key sectors that are often considered to fall within the scope of ClimateTech innovation. In this Part 2, I shared what I have learnt about the unique climate circumstances facing Southeast Asia and the possible opportunities arising from them.
In the last part of this series, I will be deep diving into the current state of affairs for select sectors in Southeast Asia and examining the climate innovation areas that may be relevant to the region. I will also explore the possible investment pathways for VC investors who are seeking opportunities in this area.
In the meantime, feel free to reach out to us at helloasia@vertexventures.com if you have any questions, or are building any innovative solutions in the space.
References
[5] https://www.iea.org/reports/southeast-asia-energy-outlook-2019
[12] https://blogs.ntu.edu.sg/hp3203-1718-s2-04/hello/
[18] https://www.bain.com/insights/southeast-asias-green-economy-pathway-to-full-potential/
[20] https://pitchbook.com/news/reports/q3-2021-emerging-tech-research-climate-tech
