How Asia Pacific is navigating the effects of climate change

Recent years have seen the issue of climate change and its ecological and economic effects move more clearly into the spotlight. It is now widely accepted that the planet cannot sustain current high-carbon industrial and consumer behaviours. With better and more reliable scientific knowledge on the subject available, economic models used to forecast the financial impacts of a steadily destabilising environment are have become sophisticated. The consensus is that climate change will have major economic and social impacts; the question is how severe those impacts will be. Due to their geographic location and level of development, the emerging economies of Asia Pacific require immediate and extensive attention to adapt and limit future damage. In 2018 alone Asia lost $54.7bn to natural disasters, highlighting the region’s vulnerability to worsening weather trends, according to an April 2019 report by global reinsurer Swiss RE.

Multilateral Efforts

At the June 2019 G20 summit in Osaka, Japan, there was consensus among 19 member states on the Paris Agreement’s “irreversibility”. While the US is the only major economy not committed to the global agenda for reducing greenhouse gas emissions, the incoming administration of US President-elect Joseph Biden is broadly expected to renew US focus on climate change. The 2015 agreement expands on plans laid out in the 1997 Kyoto Protocol to ensure that industrialised nations assist emerging economies in their efforts to mitigate the adverse effects of climate change. ASEAN member states have also reiterated their commitment to achieving the goals set out in the Paris Agreement, recognising that regional and global cooperation are essential to effectively tackle the challenges brought on by climate change.

As of November 2020, 188 countries had ratified the agreement and submitted their nationally determined contributions to tackle global warming. Ratifying parties agree to the target of limiting global warming to less than 2°C above pre-industrial levels. Scientists predict that keeping atmospheric temperatures below this threshold would save the global economy $17trn per year relative to a 4°C increase, and $4trn per year relative to a rise of 3°C. In 2018 the International Labour Organisation declared climate change to be a threat to 1.2bn jobs worldwide; as such, so it is vital that environmental strategy is used to help shape economic policy, and that a shift to the use of renewable energy becomes a global priority.

Regional Vulnerabilities

The impacts of climate change are expected to be felt most acutely in the emerging world. A 2018 study by Oxford University Press stated that the relative impacts of climate change drop as income per capita rises, suggesting that vulnerability is higher in developing nations, especially those with hotter climates. Therefore, climate-resilient infrastructure development in more susceptible countries would help to offset the negative economic effects of progressive environmental destabilisation.

The UN Economic and Social Commission for Asia and the Pacific (UNESCAP) predicts that Asia Pacific will be the region worst affected by both the environmental and economic effects of climate change, and that over 100m people in the region could be forced into poverty by 2030. Without concerted action, regional GDP could decline by up to 3.3% by 2050 and by 10% by 2100. Narrowing the scope, the impact on South and South-east Asian GDP could be anywhere between -1.8% and -6.6% by 2060. This underscores the uncertainty surrounding climate change and also emphasises the fact that every scenario involves significant economic repercussions. Part of the reason for Asia Pacific’s high level of vulnerability is that the El Niño phenomenon – a climatic event occurring every two to seven years in the eastern Pacific that manipulates ocean surface temperatures and affects wind and rainfall patterns worldwide – is expected to become increasingly frequent and more severe, as are other extreme weather events. This will unavoidably impact several key economic sectors.

The emphasis on environmental stewardship has been an opportunity to nudge financial systems towards sustainability. Foreign direct investment (FDI) in Asia remains strong, with the region receiving $474bn in 2019. FDI in South-east Asia totalled a record $156bn that year, up from $145bn in 2018. Singapore, Indonesia and Vietnam accounted for over 80% of South-east Asia’s inflows, with the region driving the growth of investment on the continent.

Transport & Logistics

Climate change has necessitated an overhaul to transport and logistics infrastructure in Asia Pacific. Extreme weather can cause major disruption as higher temperatures and more regular flooding and storm surges compromise the safety and integrity of roads, bridges and railways. The Asian Development Bank (ADB) forecast that $41bn per year will be needed for infrastructure adaptation up to 2030, with the majority going towards transport. Ensuring developments are climate resilient will make them more expensive at the design and construction stages, but the future costs of not implementing such measures will be higher. Advancements in technology should ensure that climate-proofing investments become more cost effective. “Logistics costs in Myanmar can be quite a lot higher than other ASEAN countries due to efficiency gaps,” Alex Wicks, CEO of Myanmar-based logistics firm Kargo, told OBG. “In trucking, innovative technology is enabling these gaps to be filled by connecting excess capacity and empty runs to available shipments. This maximises the utilisation of vehicles, which in turn reduces carbon emissions from unnecessary journeys.”

Asia’s transport services and ports are among the busiest in the world and are vital to global supply chains. China and South-east Asia are major manufacturing centres, so any weather-inflicted impairment of logistical efficiency and damage to storage and production facilities in the region is of global economic consequence. Flooding in Thailand in 2011 and 2012 caused business supply and communication disruptions around the world, with more than 14,500 companies affected. Indeed, the stocks of major manufacturers were destroyed: US data technology firm Western Digital lost 45% of its hard-drive shipments, US software company HP suffered losses of around $2bn, while Japanese automotive manufacturers Toyota, Honda and Nissan lost upwards of 400,000 cars between them. The total insured losses of the catastrophe were between $15bn and $20bn. As such, it is important that governments and private firms take the necessary measures to mitigate weather-related disruptions.

Tourism

The aforementioned flooding in Thailand also impacted the country’s tourism sector, inflicting an estimated loss of between $469m and $781m in inbound tourism income. This illustrates how an extreme weather event can affect multiple sectors. As well as relying on efficient transport, the tourism industry is dependent on the preservation and accessibility of popular urban and natural locations. Coastal mega-cities such as Manila, Ho Chi Minh City, Jakarta and Bangkok are all major regional tourism or business centres, yet all are under serious threat from flooding and destruction caused by cyclones and rising sea levels. Climatic instability also threatens Asia Pacific’s many small islands and low-lying areas.

“Sustainable tourism measures are always a positive sign for the country, the environment, communities, tourists and, in the longer term, businesses,” Paul Ashburn, co-managing partner of consultancy BDO Thailand, told OBG. “Investors committed to the longterm future of the tourism industry will understand the necessity of closing off endangered environments and the future benefits this will bring to the industry.”

Agriculture

The impact of climate change on agricultural productivity is expected to be most severe in low-lying nations. The agriculture sector accounts for around 10% of GDP in the majority of South-east Asian economies and provides jobs for over one-third of the region’s working population. Due to the 2015 drought, the Philippines experienced a loss of crops and agricultural land amounting to $325m, and rice exports in Thailand dropped by $430m, while rubber, palm and maize yields were also badly affected. In Indonesia 3m people dropped below the poverty line due to loss of crops and income, while the price of rice rose to 80% above the international average.

Significant as the El Niño effect is, it is only part of the problem, as many other damaging weather events occur independent of it. The IMF predicts that if climate change continues unabated, countries such as Thailand, Vietnam, Indonesia, Myanmar and the Philippines could experience a 50% decline in rice yields by 2100 compared to 1990. In addition, a study by UNESCAP found that the average annual cost of disaster-inflicted damage on Asia Pacific’s agriculture sector rose from $52bn in 1970 to $523bn in 2015. These figures display the urgency with which adaptation methods for the sector need to be implemented, as the continued destruction of land, crops, housing and facilities will force many people to relocate to large towns and cities in search of employment, increasing congestion.

Renewables & Green Finance

Cost is a significant concern for many governments’ departments of energy and power providers, particularly when it comes to pursuing a path towards renewable energy. Papua New Guinea plans to switch to 100% renewable, indigenous energy by 2050, as does Sri Lanka. The Philippines has set the conditional target of reducing its own emissions by 70% by 2030. Major investment will be required if these targets are to be met, with Sri Lanka alone needing an estimated $54bn-56bn. Advancements in green technology mean that higher energy efficiency and lower fuel and operating costs are benefits of switching to renewable power sources, while the estimated costs of damage caused by the continued use of carbon-based energies have increased. This has inspired genuine appetite for making the transition.

In ratifying the Paris Agreement, industrialised nations pledged to donate $100bn per annum to developing countries by 2020 to aid their adaptation and mitigation efforts. As of 2018 – the most recent year for which data was available – the donated sum had reached $78.9bn, with the withdrawal of the US from the agreement casting doubt over whether $100bn is achievable within the original time frame. However, there is hope that US funding could increase following President-elect Biden’s plans to rejoin the agreement.

Intergovernmental funding and investment from multilateral banks – the ADB has pledged $80bn to the region between 2019 and 2030 – is crucial, as is capital raised through green finance. In 2019 sustainable finance assets were valued at over $31trn globally, up from $30trn the year before, with finance tools such as green bonds, green sukuk (Islamic bonds), private placements and credit guarantees increasingly utilised. As of November 2018 public and private entities from ASEAN nations had issued $5bn in green bonds, which accounts for 1% of the global market, signalling vast scope to expand. Even so, progress has been made in recent years. An October 2019 report by the International Finance Corporation found that around half of the emerging markets that initiated sustainable financial reforms were in Asia Pacific. Through collaboration, cross-border green bonds can raise capital for infrastructure and climate change mitigation.

The ASEAN Infrastructure Fund, a multilateral fund co-financed by the ADB, was established to enable such collaboration. It has opened a “green window” to fund large-scale green development. A host of similar funds exist in the region. Indonesia’s Tropical Finance Facility employs public capital to stimulate private investments, focusing on sustainable agriculture and renewable energy initiatives. In 2018 it jointly funded a $350m project aimed at creating sustainable rubber plantations in the Jambi and Kalimantan provinces of Indonesia. These examples demonstrate how green financing can help reinforce national and regional economies, at both the macro and micro level, against the destabilising effects of climate change.