As the world faces pressing environmental and social challenges, impact investments have emerged as a powerful tool for driving positive change. Within the realm of impact investing, targeting hard-to-abate sectors holds immense potential to address some of the most critical sustainability issues.
Hard-to-abate sectors encompass industries with significant carbon emissions and complex sustainability challenges. Examples include energy-intensive sectors like manufacturing, transportation, construction, and heavy industry. These sectors often rely on fossil fuels and emit substantial greenhouse gasses, making them crucial focal points for sustainability efforts.
The urgency to tackle emissions in hard-to-abate sectors cannot be overstated. Addressing their environmental impact is vital to achieving global climate goals, such as the Paris Agreement’s target of limiting global warming to well below 2°C.
Impact investing itself has been experiencing significant growth in Asia. The region has seen a surge of interest and activity in impact investing, driven by the increasing awareness of environmental and social issues, as well as the pursuit of sustainable development goals. According to the International Finance Corporation (IFC), $2.3 trillion has been invested to make a beneficial impact globally as of 2020. In Southeast Asia, impact investors have contributed more than 67% of the total capital invested over the ten years between 2007 to 2016 in just the current three years overview (2020–2022).
Impact Investing Key Areas and Capabilities
One significant focus of impact investments in hard-to-abate sectors is advancing renewable energy and clean technologies. An investment in solar, wind, hydroelectric power generation, energy storage and energy efficiency solutions are critical for decarbonizing energy-intensive sectors. According to BloombergNEF, global investment in clean energy reached $303.5 billion in 2020, reflecting the substantial commitment to transitioning these sectors towards more sustainable practices.
Furthermore, the International Energy Agency (IEA) explained that Southeast Asia invested an average of $70 billion in energy between 2016 and 2020, of which 40% went to clean energy technologies, primarily solar PV, wind, and grids. By 2030, energy investment will achieve an average annual value of $130 billion, while it reaches $190 billion in the Sustainable Development Scenario (SDS). This number demonstrates the increasing interest and commitment towards decarbonizing the energy sector in the region.
For instance, Just Energy Transition Partnership (JETP) is a program launched by Indonesia and its international partners, including the US, the EU, Japan, and Canada. With an initial mobilization of $20 billion over the next three to five years, the JETP aims to support Indonesia’s shift towards renewable energy. Launched at the Partnership for Global Infrastructure and Investment event during the G20 Summit in November 2022, the program is expected to boost Indonesia’s emerging green economy and address climate concerns.
Another key area of impact investment in hard-to-abate sectors is promoting circular economy practices. This approach aims to reduce waste, conserve resources, and extend product life cycles. Investments may target sectors such as waste management, recycling, and sustainable materials. The World Economic Forum (WEF) analyzed that transitioning to a circular economy could generate $4.5 trillion in economic benefits by 2030.
Given the diverse range of impact needs, impact investing in Asia offers unique opportunities for investors to achieve specific environmental, social, and governance (ESG) outcomes. To address the challenges in this area, several capabilities are needed to effectively engage in impact investing:
Impact evaluation framework: Investors need a framework tailored to the specific impact theme and theory of change. This framework enables them to assess and measure the potential impact and the magnitude of outcomes achieved.
Proprietary data and engagement: Impact data that aligns with the impact evaluation framework is crucial. For private issuers, engaging with them plays a vital role in assessing the impact outcomes.
Industry partnerships: Building partnerships within the industry is essential for capacity building and identifying impact opportunities. Having a network of industry partners contributes significantly to impact investing strategies.
Private Investors Must Take a Role
Impact investing assets under management (AUM) currently represent a smaller portion of the overall ESG investing market, the Global Impact Investing Network (GIIN) estimated the value of the market stands at $1.1 trillion as of October 2022. However, industry research suggests that impact investment is expected to experience the fastest growth between 2020 and 2025.
In terms of asset allocation, impact investing differs from general ESG investing. While public markets dominate the majority of ESG investing, private markets play a more significant role in impact investing. This includes investments in private debt, private equity, and real assets such as real estate and infrastructure. These private market investments contribute to the larger share of impact investing AUM.
Private investors must take a role in implementing impactful investment strategies to transform the industry to become more sustainable, for example in the steel industry. Steel continues to be one of the industries with the highest emissions in the hard-to-abate sectors. The industry contributes around 8% of global emissions, mainly because 75% of steel is still produced with traditional furnaces with coal-fired power. There is an urgency to decarbonize the steel industry to achieve the global ambition of net-zero emissions by 2050.
As a private investor that focuses on sustainability investments, Gunung Capital emphasizes two strategies for maximizing decarbonization in the hard-to-abate industry through its portfolio in the steel industry. First, to be more effective by spending money on new equipment and enhancing current processes. The second is to enhance the upstream production process that will emphasize locating green raw materials.
We believe in the importance of active investment management, wherein private investment firms actively support companies in recruiting or building the required capabilities for growth and improvement. The emerging green economy in Asia presents an opportunity for a fresh start, especially benefiting smaller and more flexible firms that can swiftly adapt to sustainable practices. Another approach for investors is to pursue a strategy of acquiring and merging multiple companies to create synergies. As a result, private investors could contribute to active management, operational expertise, and a long-term alignment with the management to steer businesses towards achieving net-zero goals and fostering sustainability in the Asian market.
