Investors and venture capital managers are divided on whether Asia's climate investments are happening in areas that will cut emissions the most.
Quentin Wackett, founding partner at climate tech venture capital investment firm Wavemaker Impact, said at the annual review launch of UK International Investment (BII), the UK's $9 billion development fund, on July 17 that investors are currently misallocating capital to Southeast Asia.
Waquette estimates that 60% of climate-related venture capital investments go to the mobility sector, which produces just 12% of the region's emissions. By contrast, he noted, agriculture, food and deforestation account for 50% of total emissions.
“Agriculture and land use are big sectors (of pollution) in the region. Yes, it's an incentive issue, but inefficiencies are everywhere. So funding doesn't have to be charity if you can solve (the problem) and create value, (and therefore) create incentives for investment,” he said.
In June, Temasek became one of several investors in Rise, an agricultural technology startup launched by Wavemaker Impact to reduce methane emissions from Southeast Asia's rice industry, which accounts for a third of the region's total emissions.
In the agricultural sector, which accounts for 33 percent of Southeast Asia's methane emissions, the company is taking measures such as providing project financing to farmers to help them transition to more sustainable, higher-yielding farming practices.
A longer perspective
However, Luke Sonneveld, chairman of the European Association of Bilateral Development Finance Institutions (EDFI), told AsianInvestor that a major obstacle to investing in agriculture, food and deforestation is the long investment horizon required to generate an attractive internal rate of return (IRR).
“In our experience, climate change investments in agriculture are a relatively safe bet and can generate decent returns, while investments in deforestation take longer to mature but can generate high returns, and investments in food may be riskier but can generate high returns quite quickly,” he said.
Sonneveld disputed the idea that capital is being misallocated, saying it would be difficult to prove and counterproductive.
“It is often difficult to predict how much emissions each dollar of investment will reduce, especially when it comes to venture capital investments in innovative technologies that, if successful, could lead to mass adoption and large-scale emissions reductions,” Sonneveld said.
“The problem is not misallocation, but insufficient investment in general to address climate change. Current climate investments are nowhere near enough to stop global warming, so any investment that reduces emissions anywhere is welcome. So rather than criticizing current capital allocations,[participants]should call for a significant increase in such investments to address the challenges of global warming in agriculture, food and deforestation,” he continued.
EDFI's 15 members, with a combined total of $2.18 billion invested in Asia in 2022, include development funds from Germany, the UK, France, Norway and Sweden.
Education is important
Both Wackett and Sonneveld pointed out the benefits of investor education and the role of development institutions.
In addition to acting as a seed investor, Wavemaker, which is headquartered in Los Angeles and Singapore, aims to attract private investors to worthy projects by providing a research team with expertise in new markets to help investors validate the feasibility of their investments.
“The key is to have sufficient knowledge and experience in these investments to make the right investment decisions. Because development finance institutions have been investing successfully in these sectors for many years, more and more private investors are starting to co-invest with us to benefit from our expertise. In doing so, they can expand this asset class in their portfolios and benefit from risk diversification and adequate returns,” said EDFI's Zonneveld.
Nick O'Donoghue, CEO of BII, which invested $6 million in Wavemaker in November 2023, highlighted the potential for investments in Southeast Asia to generate emissions reductions as the fund increases its allocation to the region.
“The fund will aim to repurpose its own portfolio, help existing fund managers raise capital more easily and make better use of its own balance sheet,” he said.
The fund currently has $48 million invested in Southeast Asia (mainly Vietnam and Cambodia), while it has $2.95 billion invested in South Asia.
But it has pledged to increase its allocation to $500 million by the end of 2026, targeting climate projects in middle-income countries in the region, such as Vietnam and Cambodia.
The fund's 2023 annual report, released on July 17, highlighted that its efforts in Southeast Asia will focus on attracting private capital, either by financing the riskier parts of projects involving other investors or improving infrastructure to make sectors or projects more attractive to private investors.
“Given[Southeast Asia's]energy needs and the climate targets set by several countries, it is critical to attract additional commercial investors to unlock climate finance opportunities and support green and resilient economic growth,” the report said.
¬ Haymarket Media Limited. All rights reserved.
