Institutions, managers clash over Asia climate allocations

Investors and venture capital managers have disagreed over whether Asian climate investments are being made in areas where they most reduce emissions.

Speaking at the launch of the annual review of British International Investment (BII), the UK’s $9 billion development fund, on July 17, Quentin Vaquette, founding partner at Wavemaker Impact, a climate tech venture capital investor, said that investors were currently misallocating capital to southeast Asia.

Vaquette estimates that 60% of climate-related venture capital investments goes to the mobility sector, which generates only 12% of the region’s emissions. Agriculture, food, and deforestation accounts for 50% of total emissions, by contrast, he noted.

“Agriculture and land use are heavily [polluting] sectors in the region. Yes, this is partly about incentives, but there are inefficiencies everywhere, so if you can solve [a problem] and create value and [therefore] an incentive to invest, the financing doesn’t need to be philanthropic,” he said.

In June, Temasek was one of several investors in Rize, an agri-tech start-up launched by Wavemaker Impact, which reduces the methane emissions from southeast Asia’s rice farming industry (which account for a third of the region’s total methane).

It uses measures like providing project finance to farmers to in order support the shift to more sustainable, higher yielding practices — in a sector which is responsible for 33% of southeast Asia’s methane emissions.

LONGER HORIZONS

But Luuk Zonneveld, board chair, Association of Bilateral European Development Finance Institutions (EDFI), told AsianInvestor that a major obstacle to investment in agriculture, food, and deforestation was the longer investment horizons needed to generate attractive internal rates of return (IRRs).  

“It is our experience that climate investments into agriculture can be a rather safe bet and yield decent returns, and that investments into deforestation take longer to mature but can yield high returns, and that investments into food may be riskier, but can yield high returns rather rapidly,” he said.

Zonneveld challenged the idea that capital was being misallocated as difficult to prove and counterproductive.

“It is often hard to predict the per-dollar reduction in emissions that an investment will have, especially concerning venture capital investments in innovative technologies that, if successful, could lead to their massive adoption and large-scale emissions reduction,” Zonneveld said. 

“The challenge is not misallocation, but insufficient investment in general to address climate change. Any investment that reduces emissions is welcome, no matter what sector, as current investments addressing climate are wildly insufficient to stop global warming. Therefore, instead of criticising the current capital allocation, [participants should] call for massive increases in such investments to address the global warming challenge in agriculture, food, and deforestation,” he continued.

The 15 members of EDFI, who collectively invested $2.18 billion in Asia in 2022, include the development finance institutions of Germany, UK, France, Norway, and Sweden.

EDUCATION MATTERS

Vaquette and Zonneveld both pointed to the benefits of investor education and a role for development institutions.

Besides its role as a seed investor, Wavemaker, which is dual headquartered in Los Angeles and Singapore, seeks to attract private investors to worthwhile projects by lending out research teams with expertise in new markets, to help investors ascertain the feasibility of an investment.

“The crux is to have significant knowledge and experience in such investing to be able to make the right investment decisions. As DFIs have been successfully investing into these sectors for many years, more and more private investors start co-investing with us to profit from our expertise.

"As they do so, they can scale up this asset class in their portfolio, benefiting from risk diversification and decent returns,” EDFI’s Zonnneveld said. 

Nick O’Donohoe, CEO of BII, which made a $6 million investment in Wavemaker in November 2023, emphasised the potential for investments in southeast Asia to generate emissions reductions, as the fund ramps up its allocation to the region.

Explaining how BII uses its allocations to help mobilise private he pointed to recycling the portfolio and leveraging the balance sheet as well as “[helping[ existing fund managers raise money more easily.”

The institutional investor currently has $48 million invested in Southeast Asia — mostly in Vietnam and Cambodia — compared with $2.95 billion in South Asia.

But it has pledged to increase the allocation to as much as £500 million ($645 million) before the end of 2026, as it targets climate-related projects in the region’s middle-income countries such as Vietnam, Indonesia and the Philippines.

The asset owner’s 2023 annual review, published on July 17, emphasised that its efforts in southeast Asia would focus on attracting private capital, either by funding the riskier element of projects in which other investors are involved, or by improving the infrastructure to make sectors and projects more appealing to private investors. 

“Given [Southeast Asia’s] energy demands, and the climate targets several countries have set, it is critical to attract further commercial investors to unleash climate finance opportunities and support green, resilient economic growth,” the review noted.

This story has been updated with with new information from BII.