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Emerging Among Giants: The Energy and Commodity Opportunity as ASEAN Turns 50

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Empowering Public Private Collaboration in Infrastructure

Emerging Among Giants: The Energy and Commodity Opportunity as ASEAN Turns 50

The Association of Southeast Asian Nations (ASEAN) is set to become the world’s fourth largest regional economy by the middle of this century. A young population and rapidly expanding workforce will attract industry and drive growth in the region, creating a vast new middle-class along the way.

This will generate demand for housing and infrastructure, for cars and appliances, and for other goods and services. Energy will be required to underpin this growth, as will steel and other commodities. ASEAN is entering an exciting new era, full of opportunities as the region expands its global economic footprint and influence.

But it is not without its challenges. This report explores and discusses some of the key issues and themes applying to ASEAN in the energy and resources space, drawing upon forecasts and market intelligence from across the S&P Global group.

Key Findings

Growing demand hub
The region’s oil imports are forecast to rise to 3.53 million barrels/day by 2025, up from 1.96 million b/d in 2015. The world’s top crude oil suppliers are investing in refinery projects in a bid to capture greater value downstream in ASEAN markets. Even with a stronger push into renewable energy, coal will account for more than a quarter of ASEAN’s energy mix by 2020 and overtake oil to become the major fossil fuel by 2035.

Of particular note is that LNG demand is expected to treble to 30 million mt/year by 2022. ASEAN will be both a major importer and exporter of the fuel, with the potential to develop a major regional trading hub.

‘Lighting up’ the region
ASEAN’s per capita electricity consumption is around half the world average, and although it varies enormously between members, the average electrification rate is just under 80%, leaving millions of people literally in the dark. The ASEAN Power Grid (APG) initiative was established to support the region’s growing power demand – forecast to expand by 5-6% over the next five years – but progress has been relatively slow.

A lack of mutual confidence between member states, and concern that energy sector subsidies represent unfair competition, have held back transnational market integration. This needs to improve to optimize the potential of the APG, and to support the region’s economic development.

However, if ASEAN is to meet its target of sourcing 23% of its energy from renewables by 2025, it will need to attract billions of dollars in investment to build about 80 GW of new hydro capacity and more than 40 GW of new solar, in addition to other energy technology investments. The falling unit cost and small project size of solar in particular represents a major potential opportunity for investors.

Pricing and policy transparency
Prospective financiers will need greater clarity and transparency around electricity and energy pricing before committing funds. Subsidized prices in domestic, regulated markets are a deterrent to new operations, technologies and capacity expansions.

Investors also want to see consistency around government policy, and are concerned when policies are suddenly reversed. Sovereign risk is a key factor when making investment decisions and financiers need reassurance that their interests will not be compromised in the years ahead.

China represents both opportunity and risk
Tensions in the South China Sea, where ASEAN and Chinese maritime borders overlap and lack legal definition, pose potential risks to shipping and global trade routes, to future exploration for energy resources, and, at worst, regional conflict. Under its One Belt, One Road strategy, China is set to wield even greater influence in the region.

However, ASEAN nations could benefit from Chinese help to develop new infrastructure, such as muchneeded ports. As China matures into a domestic-consumption, rather than export-driven economy, ASEAN is well placed to attract manufacturing investment, playing a key role within wider Asian supply chains and as a major exporter of manufactured goods to world markets.

COP24 Special Edition Shining A Light On Climate Finance


− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report

Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

Read the Full Report

Plugging the Climate Adaptation Gap with High Resilience Benefit Investments


- Adaptation financing needs to substantially increase to address the higher impact of extreme weather to society due to climate change.

- Adaptation projects are typically cost effective and bring wide range of resilience benefits.

- To demonstrate the value of resilience benefits to various stakeholders we consider that it is important to quantify those benefits based on a robust modeling framework.

- We expect that due to the large size of the adaptation gap and constrained public finances,private investment would need to make a considerable contribution to adaptation financing.

Dec. 07 2018 — We believe the recent surge in economic damage from extreme climatic events may focus the attention of public authorities about the need for adaptation investments and accelerate investment in this area.The United Nations Environment Program (UNEP) forecasts adaptation costs in developing countries at between $140 billion and $300 billion by 2030, and $280 billion and $500 billion by 2050. That is approximately 6x-13x above the amount of international public-sector finance available today--just to meet 2030 costs.

Over the last two years,the world has seen a flurry of extreme weather, which has exposed the vulnerability of many countries to these events. Climate change may make matters worse, irrespective of whether we manage to keep global warming to 2 degrees Celsius or not. Attention to climate change adaptation is therefore increasing, especially about how to finance it, given the need to raise enough public and private investment to fortify exposed countries and communities against the potentially devastating effects of physical climate risk.

Read the Full Report

Watch: Empowering Public Private Collaboration in Infrastructure

S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.