Role of non-state actors and private capital flows in low-carbon energy transition: The case of ASEAN and East Asia

This paper studies the drivers of private capital flows to developing countries for low carbon energy transition and the apparent barriers to meet the Paris Agreement targets. Past studies reveal that portfolio flows to a fast-emerging country tend to rise in response to increases in the current apparent deficits; a rise in foreign direct investment (FDI) flows; high precipitate income and growth performance. Once these variables are accounted for, location and regional factors did not seem to influence the private flows. On the other hand, capital flows across the region into low carbon energy sectors such as renewable energy and energy efficiency are shaped by several factors which include, perceived risks of making investments or developing projects due to changing/inconsistent government policies, a lack of access to de-risking financing mechanisms, and minimal knowledge and communication between borrowers and lenders. Public finance, including international financial institutions appears to have a guaranteeing role in response to volatility of private flows and the barriers attached to it. A regression analysis of the factors that drive various types of capital flows into the developing countries of South and East Asia is conducted on data derived from 1500 questionnaires. The respondents are classified as non-bank financial institutions (private equity and venture capital), commercial banks/credit agencies, international financial institutions, and international investors, which further can be categorizes as lenders. The results obtained from the analysis of country-level and regional data mostly complement and confirm the findings from aggregate data analysis. Econometric results reveal that FDI flows rise in response to increases in growth performance. Opportunities to raise capital from the public sector to finance the low-carbon transition are limited, which means that private and commercially sourced financing must be included in low-carbon energy project development. Private investors make investment decisions based on risk return prospects. Several bankable projects in developing and emerging economies of Association of Southeast Asian Nations (ASEAN) and East Asia are not being implemented due to the lack of financial resources at an affordable cost. To this end, it is critical that national and regional institutions take actions to create policy solutions that leverage a greater degree of low-carbon energy investment. The perception of market risks, the inability to mitigate these risks, and the lack of communication and coordination amongst market participants have been the key barriers to optimizing the low-carbon investment environment.