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Climate change mitigation and adaptation efforts are urgently needed across Southeast Asia. To achieve low-carbon and climate-resilient economies, the ASEAN-5 economies¡ªIndonesia, Malaysia, Philippines, Thailand, and Vietnam¡ªmust undergo a costly but necessary economic transformation toward low-carbon and climate-resilient economies.

The financial sector can play a critical role supporting countries in their journey toward greater resilience and sustainability, but it must adapt to do so effectively. Sustainability considerations must become mainstream, entering the core of the decision-making processes of financial institutions.

This report shows that while sustainable finance has experienced widespread expansion, sustainable debt and equity markets remain small and unable to meet the funding needs of ASEAN-5 economies for their various sustainability objectives. For example, the total amount of sustainable debt raised annually increased from $0.25 billion in 2016 to $6.75 billion in 2021, bringing the total amount of outstanding sustainable debt to about $24 billion. Yet, this report shows that sustainable markets remain a small fraction of conventional markets, suggesting the potential for further growth of sustainable finance is largely untapped.

The outreach of sustainable financial markets is extremely limited, with sizeable gap in sustainable financing, especially for small and medium enterprises (SMEs). Excluding financial firms, less than 100 firms in the ASEAN-5 have tapped sustainable equity and debt markets since 2017. Sustainable debt markets have financed mostly listed firms with an investment grade, whereas private equity markets have funded small corporations with projects in climate and/or clean technologies. In addition, unlike more developed markets, green financing is channelged mostly to the energy sector.

To unleash sustainable finance in Southeast Asia, policy makers must REACT to mobilize private capital towards sustainability. This report proposes a new framework for policy action, the five REACT policy priorities, with policy implementation as an important cross-cutting theme:  

1. Readiness: policymakers should mitigate investment challenges for creditors and investors, especially those associated with the high riskiness of investments in sustainability.
2. Enabling environment: policy makers should foster a supportive enabling environment to broaden financial market development, focusing on improving local financial market infrastructures.
3. Analytics: Closing data gaps and enhancing information systems should be a policy priority. High-quality, granular, and timely data must be collected and accessible to a broad set of stakeholders. Effective implementation of taxonomies and disclosure standards, with the ultimate goal of wider implementation across the private sector at large.
4. Capabilities: building capabilities and enhancing sustainable finance literacy can accelerate the mainstreaming of sustainability in finance. These efforts should go beyond financial institutions themselves and encompass policy makers and the private sector at large.
5. Transition: to ensure a ¡®just transition,¡¯ policy makers should pay close attention to firms that may be negatively impacted by the transition toward greater sustainability as well as those that face greater risks of exclusion from current sustainable financial markets.

Fostering sustainable financial market development will require a holistic approach to catalyze private investments. Policy makers should also consider the broader and complex policy landscape for the development of more sustainable and resilient economies. Of particular importance is the agenda supporting firms in building climate change resilience and becoming more sustainable.