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The Association of Southeast Asian Nations, typically abbreviated to ASEAN, comprises ten member states in Southeast Asia, namely, Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam. It has ushered in a new era of economic development and opportunity since the 2000s, with an average annual GDP growth rate of 4.2% in the past ten years and a total GDP of around US$3.6 trillion in 2022. [1]
Despite a fast-growing trade bloc, the GDP per capita among the member states remains relatively diverse, ranging from a low of US$1,130 in Myanmar to US$82,795 in Singapore in 2022 (Figure 1). [2]
Over 60% of economic activities in the more developed and middle-income member states, including Singapore, Malaysia, Thailand, and the Philippines, are service-based, spanning across tourism, processing, transport etc., while Brunei and the rest are predominantly industrial- and agricultural-focused respectively. [3] Following the recovery from Covid-19, ASEAN’s GDP growth is expected to rebound, with a projection of it being on track to become the world’s fourth largest economy by 2030. [4]
Micro, small, and medium-size enterprises (MSMEs) are said to be the backbone of the ASEAN economy as they are involved in every area of economic activity, particularly in retail, trade, and agricultural activities from labor-intensive and low value-added sectors. There are over 70 million MSMEs in the region, contributing to 85% of employment, 45% of GDP, and 18% of national exports among the ASEAN states. [5] MSMEs are therefore part and parcel for achieving sustainable economic growth and social development in the long-run.
Due to the relatively small scale and company size of SMEs, their potential is usually not fully realized. The Asian Development Bank documents some major challenges that SMEs generally face, including a lack of financial, technological, and human resources for adapting to a rapidly changing market demand, insufficient market access and information, increased market competition with large firms, a lack of networks and experience, and a state of ‘churning’ and instability. [6]
To achieve sustainability transitions, SMEs would also need to deal with the rising sustainability challenges that are unique to each ASEAN country. For instance, Singapore, as the most developed country among all ASEAN states and arguably one of the most prosperous global economies, has a high cost of financing. The lack of financial resources that SMEs without a strong track record may face will also become a significant burden to them, making it difficult for them to expand and grow in the sustainable finance market. In the Philippines, on the other hand, SMEs need to deal with market access problems due to the unique geographical composition of the country, which is an archipelago with over seven thousands of islands and dozens of languages. [7] Many of these islands are remote and difficult to access. The cultural and language differences also suggest that the taste and preferences of those inhabitants may vary, thus increasing the difficulty for SMEs to design one-size-fits-all products and services for the people.
Current financial instruments for SMEs
The Organisation for Economic Co-operation and Development (OECD) [8] and the ASEAN Secretariat [9] document various ways for SMEs to access finance in the ASEAN region. The characteristics and benefits of these sources of fundings for SMEs are as follows:
Access to finance and resources have been one of the major obstacles for SMEs to obtain sufficient funds that drive their transition to sustainability in business. The financing instruments mentioned above allow SMEs to seek the source of funding they need within the ASEAN region through various possible ways.
However, the application process can be complicated, and many SMEs have experienced rejection or unsuccessful attempts in securing the funding they need. With this regard, SMEs may turn to some online advisory firms that are readily available for them. Most of these agencies are specifically designed to help SME startups to overcome any difficulty they face by providing useful advice, consultation services, and hands-on experiences to which they can refer.
Sustainable finance taxonomies and initiatives
ASEAN taxonomies
National taxonomies of sustainable finance among ASEAN member states vary in scope and approaches as they are based on different priorities, principles, tolerances, and pathways in their respective jurisdictions. [11] The inconsistency and discrepancy in these taxonomies are not favorable for facilitating international investment across ASEAN countries. In light of this, the ASEAN Taxonomy has been developed to cater to the different ASEAN economies as well as in parallel with other international taxonomies, seeking to harmonize the classification of sustainable activities and assets across the region and address similar environmental objectives as laid out in other taxonomies. [12]
Four environmental objectives are identified:
- Climate change mitigation – to avoid and reduce greenhouse gas emissions;
- Climate change adaptation – to increase an organization’s resilience to climate change;
- Protection of healthy ecosystems and biodiversity – to incorporate the element of conservation of natural ecosystem and biodiversity into economic activities; and
- Promotion of resource resilience and transition to circular economy – to facilitate sustainable use of natural resources and achieve maximum possible benefit with least possible resource input. [13]
The proposed economic activities to mitigate climate or environmental impacts should fulfill two essential criteria:
- Do no significant harm (DNSH) and
- Remedial measures to transition.
The principle of DNSH means that any economic activity that is undertaken to contribute to any of the environmental objective shall also not significantly harm any of other environmental objectives. The second criterion suggests that the risks and impacts of the proposed actions should be anticipated, and measures should be taken to avoid or minimize those impacts at the onset. [14]
Government policies & industry initiatives
To further assist SMEs to deal with the identified challenges and issues in their transition to sustainability, both the governments and industry within the ASEAN region have proposed relevant sustainable finance initiatives.
Most governments within ASEAN, such as Thailand, Vietnam, the Philippines, Malaysia, Singapore, and Indonesia, have established their own stock exchange, coupled with the issuance of stock exchange and ESG guidance documents to ensure that ESG data can be reported in an international and standardize manner. [15] This helps ameliorate the unsystematic reporting of ESG information due to contrasting ESG practices across the region, which will enable the delivery of more comparable financial and non-financial information for companies.
Some national governments also offer a wide range of financial incentives, such as grants and rebates, to support SMEs’ participation in sustainability initiatives. For instance, the Enterprise Sustainability Program is designed to support Singapore SMEs to build capacities and capture new opportunities in the green economy. [16] Subsidies and grants are offered for participation in sustainability courses and other capability and product development projects. [17] The government of Vietnam has been assisting local SMEs in their transition to sustainability through increasing their access to finance and implementing new legislation, which allow them to be taxed at a lower rate than other corporates within the nation and enjoy other non-tax incentives. [18] Banks and other financial institutions are also issuing more loans to finance environmental projects or offering lower interest rates to borrowers if specific sustainability goals can be met. [19] SMEs may benefit from these projects by adopting renewable energy, having sustainability certifications, or other similar endeavors.
With the surge in popularity of ESG investing, there arises a higher risk of greenwashing in the development of a credible sustainable finance market. It refers to a marketing or advertising spin where companies or bond issuers provide misleading and even false information regarding their ESG credentials, which undermines the credible efforts to reduce carbon emission and climate crisis. [20] To ensure that investors’ money can go to projects that truly create a positive social and environmental, it is important to ensure companies are as green as they purport to be and identify those that are largely profit-making. Singapore has made some key strides in addressing greenwashing. It unveiled an action plan to benchmark environmental reporting standards, scrutinize companies that apply for government grants to support their green moves, and crack down on companies that use green financing to bankroll carbon-intensive companies, which is also known as ‘transition-washing’. [21] Greenwashing can also be treated as a misrepresentation or fraud, according to the law of a particular jurisdiction. Investors can seek legal recourse if a company allegedly uses greenwashing tactics to attract investments. [22]
SME’s participation in sustainable finance
To further expand the sustainable finance market in ASEAN region to fund economic activities with boarder range of environmental and social benefits, different types of bonds and loans have been issued.
These include:
- sovereign green bond
- sovereign sustainability bond
- Certified Climate Bond
- World’s first green sukuk
- Sustainability bond
- Social bond
- Green loan, comprising a cumulative issuance value of over USD29.4 billion. [23]
The proceeds generated from the issuance of sustainability-labelled bonds or loans are used in a wide range of projects in renewable energy, buildings, land use, poverty reduction, improving water quality etc. that aim to create positive social and environmental impacts. Despite a promising sign in the development of sustainable finance, policy frameworks for sustainable finance are still at an early stage of implementation. The is a lengthy road for ASEAN economies to travel before sustainability will be fully integrated into investment decisions. [24]
Bibliography
[1] Hong Kong Trade Development Council, ASEAN: Market Profile, HKTDC Research (Jan 02, 2024), https://research.hktdc.com/en/article/Mzk5MzcxNjEz.
[2] ASEAN Secretariat, ASEAN Statistical Highlights 2023 (Sep 2023). https://www.aseanstats.org/publication/ash-2023/.
[3] ASEAN Taxonomy Board, ASEAN Taxonomy For Sustainable Finance Version 1 (November 2021), https://asean.org/book/asean-taxonomy-for-sustainable-finance/.
[4] Allurentis, Investing in ASEAN 2023 (Dec 2022), https://asean.org/wp-content/uploads/2022/12/investment-report-2023.pdf.
[5] ASEAN, Development of Micro, Small, and Medium Enterprise in ASEAN (MSME): Overview, https://asean.org/our-communities/economic-community/resilient-and-inclusive-asean/development-of-micro-small-and-medium-enterprises-in-asean-msme/ (last accessed on Jan 17, 2024).
[6] Naoyuki Yoshino and Farhad Taghizadeh-Hesary, Major Challenges Facing Small and Medium-sized Enterprises in Asia and Solutions for Mitigating Them, ADBI Working Paper Series No.564, Asian Development Bank Institute (April 2016), https://www.adb.org/sites/default/files/publication/182532/adbi-wp564.pdf.
[7] Jamil Paolo Francisco and Tristan Canare, The Challenges to SME Market Access in the Philippines and the Role of Business Associations, Asia Pacific Foundation of Canada (January 2019), https://apfcanada-msme.ca/sites/default/files/2019-01/The%20Challenges%20to%20SME%20Market%20Access%20in%20the%20Philippines%20and%20the%20Role%20of%20Business%20Associations_edited.pdf.
[8] OECD, Alternative Financing Instruments for ASEAN SMEs (2020), https://asean.org/wp-content/uploads/2012/05/Alternative-Financing-Instruments-for-ASEAN-SMEs.pdf.
[9] ASEAN Secretariat, Handbook for MSME Access to Alternative Sources of Finance in ASEAN (2017), https://asean.org/wp-content/uploads/2012/05/Final-Handbook-for-MSME-Access-to-Alternative-Sources-of-Finance-in-AS....pdf.
[10] World Trade Organization, The Challenges of Trade Financing, https://www.wto.org/english/thewto_e/coher_e/challenges_e.htm (last accessed on Jan 17, 2024).
