Bankable Insights: Sustainability Edition II - February 2021
Sustainability edition II
*Bankable Insights* Sustainability edition II:
Rebuilding for a sustainable future
February 2021
Rebuilding for a sustainable future
Daniel Hanna
Global Head, Sustainable Finance
2021 has started with positive news on climate despite the difficult backdrop of COVID. The US re-joined the Paris Agreement to keep global warming well below 2 degrees and more than 100 countries have now pledged to net zero by 2050, which means they will emit no more CO2 than is removed from the atmosphere. This follows China committing to become net zero by 2060 last year. These commitments, if they happen, will help slow global warming over the coming decades. However, commitments are the easy part. Moving from words to action will mean transforming every activity in modern life and every sector of the economy. Rapid action is needed to make meaningful progress on reducing emissions and also ensuring progress towards lifting living standards and achieving the UN Sustainable Development Goals by 2030.
In emerging markets, governments still need to attract international and private sector capital to help fund their sustainable development requirements. We believe that capital is not flowing into these markets, where it matters the most, and where it can have the most impact. For instance, a solar energy investment in India will help avoid over 7 times more CO2 than one in France.
Rapid action is needed to make meaningful progress on reducing emissions and also ensuring progress towards lifting living standards and achieving the UN Sustainable Development Goals by 2030.
Looking at our $50 Trillion Investor Panel’s investment in SDG 7 (affordable, reliable and sustainable energy for all), there is a gap of USD3.5 trillion to reach the private-sector investment required over the next decade. This means that in these countries, there is an opportunity for both the public and private sector to collaborate towards driving capital towards sustainable development such as roads, buildings, energy and water projects.
Our research also shows that global investors are generally underinvested in emerging markets, with at least two-thirds of their AUM (assets under management) currently invested in developed markets despite the fact that almost nine out of 10 global investors have seen their emerging-market investments match or outperform those in developed markets. The articles we have collated in this edition of Bankable Insights reflect many sustainable development opportunities across emerging markets.
This edition of Bankable Insights focuses on the opportunity for individuals, corporates and institutions presented by the shift towards sustainability. We look forward to hearing your thoughts on the articles and working with you to deliver the ideas presented within them.
<BR><BR><BR><BR>**Sustainable development – in good times and bad**
Sustainable development
– in good times and bad
The narrative around the economic impact of Covid-19 is now well trodden – yet still so uncertain. The World Bank’s 2020 baseline for global GDP was a contraction of 5.2 per cent as of June1, yet how this could change as the pandemic’s pace alters is near impossible to predict.
What is now certain is the short-term destabilising effect this will have on the global economy, but especially on emerging markets – and the communities that rely on economic growth for survival. In recent estimates, 60 million people could be pushed into extreme poverty in 2020 as a result of the economic crisis2.
Plugging the huge infrastructure gaps in developing markets — particularly those across Asia, Africa and the Middle East — has long been considered key in driving growth and alleviating poverty3. This is all the more critical as we move beyond the current crisis.
The good news is that the pace of projects underway pre-crisis is not expected to drop off to the same extent as seen in previous crisis periods, according to Swiss Re4. Indeed, the insurer cited such investments as being “a key driver of growth in emerging markets post Covid-19”. This expectation for continued project pace will be welcome news for financiers like Standard Chartered, whose clients continue to seek economic opportunities in the above-mentioned developing markets.
It’s important to note that these investments don’t need to come at the expense of the sustainability agenda. While the sustainability narrative has taken a back seat in recent months, the pandemic has in fact arguably made the UN’s Sustainable Development Goals (SDGs) even more relevant — and the need for infrastructure that is more resilient to social and economic shocks all the more urgent5. Moreover, investing in resilient infrastructure for low- and middle-income countries has recently been proven to drive huge returns — paying for itself four times over, according to the World Bank6.
This expectation for continued project pace will be welcome news for financiers like Standard Chartered, whose clients continue to seek economic opportunities in the above-mentioned developing markets.”
Credit someone here…
The sustainability conundrum
Perhaps the greatest challenge of the sustainable infrastructure agenda comes on the environmental front. The developing markets that have grown rapidly in recent years have not always done so without a green focus at the heart. In Southeast Asia, for instance, demand for coal is forecast to grow 4 per cent per year through 2024. And depending on the measurement used, developing countries are already believed to account for around half of the world’s global emissions7. Further, while developed-market emissions are expected to decline slightly, those of developing markets’ are expected to rise, according to the US Energy Information Administration8.
This issue of course comes into conflict with such markets’ urgent infrastructure needs. “Infrastructure is a key driver of growth and job creation, but it can come at a cost, with World-Bank estimates suggesting that infrastructure construction and operations account for 70 per cent of global greenhouse emissions,” said Daniel Hanna, Head of Sustainable Finance at Standard Chartered. “The USD26 trillion in infrastructure investment that is required within developing Asia alone is both a risk and an opportunity.”
Overcoming such conflict and establishing the investment needed is clearly a huge challenge. However, there are already signs that developing-market infrastructure projects across Asia, Africa and the Middle East are taking firm steps in a more sustainable direction. Spending trends and growth forecasts, for instance, indicate that energy infrastructure comprises the largest share of estimated investment in these markets with a core focus on renewable energy. And this doesn’t just mean addressing environmental challenges. A truly sustainable outlook for economic development will encompass multiple aspects, from water management to education and training to improving public health systems. Key to all this, will be the financing.
The private sector’s moment
Private sector investment (both from multinational development banks [MDBs] and ‘standalone’ private finance) has been strong and growing in the past decade9, yet is still not where it needs to be. A World Bank study10 from 2017 found that 87 per cent of funding for developing-market infrastructure projects came from the public sector. And with the infrastructure gap still so huge—current estimates are that this could reach USD15 trillion by 2040—there is now a widespread understanding that private sector investment in such projects will be critical to ensuring it is plugged.
Aside from the sheer need of its funds, increased involvement from the private sector should also bring stronger environmental, social and corporate governance (ESG) principles to the table. With many of these financiers already adhering to strict ESG standards, as they become more involved in such projects, the environmental governance across these markets should naturally strengthen.
MDBs like The Asia Infrastructure Investment Bank (AIIB) have been leading the charge in many respects. For example, between 2019 and 2021 alone, the organisation committed to investing over USD1 billion in energy projects to increase renewable energy generation and access to affordable and sustainable electricity in the Asia-Pacific region.
The financial services industry is also increasingly doing its part. Global banks are steadily adopting stronger ESG principles—in particular, by ‘greening’ their finance. Many, including Standard Chartered, have committed to stop financing new coal projects. And both banks and multilateral bodies are increasingly applying green principles to their lending activities in developing markets.
Beyond the environment, private financiers are increasingly identifying opportunities to support broader sustainable goals, while also seizing lucrative business opportunities. For example, in its recent ‘Opportunity 2030’ report11, Standard Chartered identified the ‘USD10 trillion investment opportunity’ for the private sector that specifically contributes to solving select SDGs.
Urgent: Frameworks needed
To drive a focused sustainability agenda for infrastructure development in emerging markets, the implementation of sustainable and responsible investment principles will also be critical.
Progress has been made towards this, in particular on the environmental front. The Climate Bonds Initiative, The Principles for Responsible Investment and the UNEP Inquiry are among the coalitions leading the charge.
Yet for current and future projects—and for the economies and communities they serve—to be truly sustainable (economically, environmentally and socially), the widening adoption of investment principles needs to be integrated into a holistic approach to development. Such an approach must marry green energy and green finance with better management of water and waste, circular principles of economic growth, and grassroots initiatives to bolster employment and education.
Covid-19 has demonstrated that sustainable development initiatives must build capacity in economies and societies to both endure and recover from external shocks. This will require governments and businesses to work together to identify and invest in projects that deliver multiple benefits to society over the long run. Moreover, growing support from international banks and investors could help to reduce the financial and ESG risks of such projects and cement a more sustainable future for all.
Covid-19 has demonstrated that sustainable development initiatives must build capacity in economies and societies to both endure and recover from external shocks.”
<BR><BR>**Facilitating solar adoption**
Facilitating solar adoption
For many parts of the world, solar energy has become one of the most cost-effective modes of power generation1. The photovoltaic (PV) solar market increased by 12 per cent in 2019, with the top five national solar markets – China, the United States, India, Japan and Vietnam – responsible for around 56 per cent of newly installed solar plants2.
As the global economy reels from Covid-19, an underlying dialogue of rebuilding economies more sustainably is moving into the limelight3. Investment in sustainable energy should be high on this list; and given solar energy’s rising capacity (electricity generated globally from solar rose 22 per cent in 20194), many are hopeful that the current crisis could spur a renewed solar opportunity.
After Covid-19’s impact initially stalled certain energy projects at the beginning of 2020, momentum around solar projects seemed to revive by the middle of the year. At the end of May, the Malaysian government opened a new tender phase for a large-scale solar programme – expected to attract almost USD1 billion in investments5.
In Africa, solar energy could be an exception to any immediate slowdowns, driven by the past few years of rapid developments in the space6.
The above examples would suggest an unaltered demand for renewable energy investment. And as investment in solar rises, it will also become more affordable. This offers a ray of hope for the solar industry – and for livelihoods across developing markets.
State of solar energy in developing markets
Developing countries are now considered to contribute to almost half of all global carbon emissions7. Without significant changes to the energy landscape, that proportion could rise to three-quarters by 2050, jeopardising efforts to limit climate change.
And with severe power shortages curbing growth and restricting livelihoods in many developing countries, more and more energy production is needed.
This represents an opportunity for renewable power which is gaining ground in developing markets.
As of 2019, the world’s largest solar plants were all located in developing countries: the Noor Abu Dhabi solar farm, the Noor Complex in Morocco, the Longyangxia Dam park in China, and the Kamuthi, Kurnool and Shakti Sthala facilities in India.
Such activities are contributing to a shift in direction for the energy sector. According to research by Bloomberg New Energy Finance, renewable energy will account for 77 per cent of the USD13.3 trillion invested in power-generating capacity between now and 2050.
If this rate of change continues, half of all the world’s power will be generated by wind and solar by 2050 – an investment opportunity that cannot be ignored. For Standard Chartered and its clients, who continue to pursue investment opportunities across Asia, Africa and the Middle East, keeping a close eye on the associated investment opportunities is critical.
As of 2019, the world’s largest solar plants were all located in developing countries: the Noor Abu Dhabi solar farm, the Noor Complex in Morocco, the Longyangxia Dam park in China, and the Kamuthi, Kurnool and Shakti Sthala facilities in India.
Challenges ahead
The adoption of wind and solar power is not without challenges, however. The absence of stable policy frameworks (particularly in developing markets), challenges with integrating renewables into existing grids, overcoming the intermittent nature of solar and wind power sources, and risks associated with long-term power purchasing are all significant obstacles.
Clean energy dominates investment in 2018
Yet these are steadily being surmounted.
One means of overcoming these is by constructing wind and solar facilities on a massive scale – of the kind already being seen in India and China. Elsewhere, Dubai is investing USD13.6 billion in an enormous solar park that will become the world’s largest, along with several international banks including Standard Chartered financing the investment. Already capable of producing 213 megawatts (MW), when complete by 2030 it will generate 5,000 MW, enough to power 1.3 million homes and cut carbon emissions by 6.5 million tonnes a year.
50% wind and solar generation by 2050
Yet it’s important to remember that Dubai is a wealthy emirate. For many developing nations, the cost of building plants on this scale is a major barrier to a clean-energy future. Countries will not shift to renewable power until it is cheaper to produce than fossil-fuel alternatives. This barrier is often described as the ‘tipping point’.
The need for a transition to cleaner sources of energy is most urgent for developing nations. Large-scale investment in these markets will help lower the physical and financial barriers to accessing renewable energy – and this in turn will create lasting impact, by driving prices down towards grid parity for developing markets.”
Sujay Shah
Global Head of CleanTech at Standard Chartered
Towards the tipping point
That tipping point is being brought closer, partly because of the plunging cost of renewables. The price of PV cells used to generate solar power plummeted by 82 per cent between 2010 and 2019. This has enabled many developing countries to accelerate the process of energy transition.
Photovoltaic module prices have fallen 83% since 2010
Thailand achieved 50 per cent of its intended 2036 solar target of 6 GW in 2015. Vietnam has about 20 GW of solar investments in the pipeline, about half its existing capacity. China has already exceeded its 2020 solar targets by more than 50 per cent.
In one particular example, in December 2018, a 500 MW solar farm in China hit an important milestone when it began selling power at RMB 0.316 per kilowatt hour, cheaper than the price of coal-fired power for the first time. Elsewhere, the fourth phase of Dubai’s massive Mohammed bin Rashid Al Maktoum Solar Park is promising to deliver the world’s cheapest prices for Concentrated Solar (7.3 US cents per kilowatt-hour) and PV (2.4 US cents) power. That compares with hydrocarbon costs of between 5 and 17 US cents.
Lessons from these initiatives – and specifically the technologies that support them – if applied across developing countries could have profound implications for transforming the world’s energy future.
A place in the sun
While these large-scale projects have been a driving force in the recent evolution of solar power, they are not the only solution towards a solar future.
Community solar projects – where power generation provides electricity, maintenance jobs and income – have enormous potential throughout developing countries, demonstrating that the shift to clean energy can take place on multiple levels.
China is one country that has done this at scale. Its National Energy Agency launched an initiative in 2016 giving financial incentives and technical assistance to approximately two million poor households in 16 of the country’s provinces for the installation of rooftop solar panels. Not only do the homes get cheap electricity, they can also earn money selling power back to the grid, helping to manage problems related to solar intermittency. Likewise, property owners in Vietnam can lease their space to developers through an increasingly popular Roof Leasing Model. In turn, the developers install and maintain solar panels, selling electricity back to the building owner and the local power authority.
“What we’ve seen so far has just scratched the surface,” added Shah. “There are exciting opportunities ahead for a more renewably-sourced energy market – particularly in solar. This creates opportunities for more jobs, and ultimately improved lives across developing markets.”
In the past, economic recovery efforts have often been associated with higher emission growth than before the crisis. Moving forward if governments and businesses commit to acting in the interests of both humanity and the economy, development projects across Asia, Africa and the Middle East can also look forward to tapping into more sources of clean energy.
Not only do the homes get cheap electricity, they can also earn money selling power back to the grid, helping to manage problems related to solar intermittency.
<br><br>**Sustainability through ESG financing**
Sustainability through ESG financing
The objective of green financing is to ensure more capital is directed to serve the long-term needs of an inclusive, environmentally sustainable economy. And for the large-scale infrastructure gaps that have long persisted in developing markets, the opportunity to channel investments that are sustainable in nature is one that should be urgently addressed.
The narrative around green finance has accelerated in recent years. Indeed, this topic was front and centre at the World Economic Forum in Davos in January 20201. What the participants at the forum – and those watching the world over – were about to learn was that Covid-19 would soon threaten to derail the sustainability agenda.
The short-term reality indicates stinted momentum around green finance. Indeed, green bonds have seen a decline in issuance since Covid-19 set in, according to Mark Oliphant of The International Stock Exchange Group2. However, the issuance of sustainability and social bonds – an arguably under looked element of sustainable finance – has on the other hand increased. This is perhaps unsurprising, as corporates and governments shift short-term priorities to enable funds raised to address the immediate social implications of Covid-19.
Near-term reactions to the pandemic aside, broadening the sustainable finance dialogue to beyond just green financing is an important agenda – one that Covid-19 may catalyse. Indeed, flows into sustainable funds in Europe more than doubled to a record high of EUR54.6 billion in the second quarter of 2020 amid growing interest in ESG issues.
When it comes to bridging infrastructure gaps in developing markets, a sustainably funded future will be one that does so with the interests of all aspects of ESG investing at the heart. That drive is evident in the push to ESG assets among emerging markets investors, though a shortfall of investment options remains a barrier.
Ready for private investment
Financing attempts to plug the infrastructure gaps in developing markets across Asia, Africa and the Middle East have, to date, largely come from multilateral development banks (MDBs) and government-backed lenders. MDBs, for instance, commit around USD100-120 billion to development projects in low and middle-income countries every year. This in many cases was a critical first step – providing urgently-needed funding and mitigating some of the risks that can deter private capital investment.
At the same time, it’s clear that public funding will not be enough. The Asia-Pacific region alone is estimated to have an infrastructure funding gap of about USD22.6 trillion through 2030, according to Asian Development Bank. Public sources alone will simply be unable to plug this.
MDBs, for instance, commit around USD100-120 billion to development projects in low and middle-income countries every year. This in many cases was a critical first step – providing urgently-needed funding and mitigating some of the risks that can deter private capital investment.
When approaching large-scale, long-term projects, investors naturally plan for financial sustainability from start to finish. With the growing awareness of the effects of carbon-intensive development projects on an already-stressed global environment, it’s no longer enough to limit sustainability considerations to the structuring of financial obligations. Nor can the need to raise and channel funds to socially-minded projects be ignored. For the multilateral lenders, private-capital investors and even state-backed entities that invest in developing market infrastructure projects, sustainable finance principles are increasingly a core requirement.
Financiers have an obligation to support developing-market projects that are being built with sustainable principles. We’re committed to ensuring that such projects have a positive impact on communities and environments in our markets, as are investor clients and shareholders.”
Simon Cooper
CEO of Standard Chartered’s Corporate, Commercial and Institutional Banking division
Booming green bonds
The movement towards green finance (pre-Covid-19) had already been gathering pace. The green bond market grew a staggering 51 per cent in 2019 from the year prior, to a new global issuance total of USD257.7 billion3. And while the issuances remain heavily concentrated among three countries (the United States, China and France), the market is increasingly diversifying. Last year saw a particularly welcome development – in that all new market entrants were from developing countries, according to the Climate Bonds Initiative4.
While social bonds have not seen nearly as much growth as green bonds, they arguably have the most potential. S&P expects social bonds to emerge as the fastest-growing segment of the sustainable debt market in 2020. This, it notes, is in sharp contrast to the broader global fixed-income market, for which it expects issuance volumes to decline this year5. And while perhaps initially driven as a reaction to Covid-19, S&P noted that the “appeal of social bonds as a sustainable finance instrument may endure after its effects have subsided.”
Regardless, more needs to be done to ensure sustainable capital-raising across the board – especially when it comes to developing markets.
This creates massive opportunities for the private financial sector to play a bigger role in funding developing-market infrastructure projects. For its part, Standard Chartered is seeking great involvement in this space – having in 2019 issued its first Sustainability Bond focused on emerging markets to fund projects including wind and solar power, railways and water treatment.
Frameworks needed
Financial products aside, the establishment of frameworks for sustainable investing are vital to drive the sustainable finance agenda in the long run. On an international scale, several sustainable-finance initiatives have been established – the majority since 20176. Reflective of the general pace of development, these initiatives have focused on the green side of sustainable investing thus far.
This is also the case at a regional level. Among developing markets, both China and the ASEAN region have led the charge, with various new initiatives launched in the past few years. Perhaps most notable are the ASEAN Social Bond Standards7 and ASEAN Sustainability Bond Standards8. Launched in 2018, these have already been embedded into country-based frameworks by Malaysia and the Philippines.
There are early signs of frameworks establishing elsewhere. For example, Kenya recently launched its new green bond framework9 – marking an important first step in the African continent.
For the broader sustainable finance bond market to grow however, more will need to be done across developing markets. This will help ensure both investors and issuers are supported and encouraged to move deeper into this underdeveloped space.
Financial products aside, the establishment of frameworks for sustainable investing are vital to drive the sustainable finance agenda in the long run.
Once the fundamental parameters of financing are in place, the expansion of the developing-market funding ecosystem will continue to accelerate, as more asset owners and managers realise the opportunities. And with this, comes the prospect of instruments that channel funds specifically to developing-market projects moving further along the ESG continuum.”
Simon Cooper
CEO of Standard Chartered’s Corporate, Commercial and Institutional Banking division
In the post-Covid-19 world, whatever the economic stimulus for developing-market infrastructure projects – whether from private or public sources – for a sustainable recovery of the initiative, there is an undeniable need to focus on supporting sustainable business practices.
<BR><BR>**Fostering the global circular economy**
Fostering the global circular economy
Turning the world circular
The now well-known infrastructure gap in developing markets is in increasingly urgent need of bridging. South Asia alone would need to invest some USD1.7 to USD2.5 trillion to close it1. In Africa, the continent’s gap sits at more than USD50 billion each year,2 while the Gulf Cooperation Council countries will need some USD320 billion annually3.
Promising steps are being made to fill these gaps. And there are increased hopes for infrastructure to be funded sustainably and with more renewable energy – especially in the wake of Covid-194 5.
Yet infrastructure development requires construction, which in turn requires vast quantities of materials. This poses a pressing question for the future of infrastructure projects in developing markets across Asia, Africa and the Middle East: how can the gap be closed without placing an excessive load on the planet’s already-strained resources?
The amount of materials used by the global economy has quadrupled since 1970. A 2020 report by the Circle Economy Thinktank found that humanity consumes more than 100 billion tonnes a year, while the rate of re-use has fallen to just 8.6 per cent6. About one-third of those materials are still in use a year later, but 15 per cent are released into the atmosphere as climate-heating gases, and nearly one-quarter are thrown away.
Given the vast need for infrastructure in developing markets, concerns about adding to the environmental load are justified. As a result, governments and developers need to think outside the box and the principles of circular economies could prove the answer.
The circular solution
The best solution to break the long-term linkage between economic growth and environmental damage could lie in the development of circular economies. That is, the shift to a more sustainable model of growth that limits the use of natural resources by focusing on re-use, remanufacturing and recycling.
In Europe, 13 countries have already adopted circular economy roadmaps, among which Sweden is probably the most successful example. Households in the Scandinavian country recycle 99 per cent of their waste, and the country has developed its re-use capabilities to the point that it now imports waste from other countries. Elsewhere, the Port of Rotterdam – the largest in Europe – is undergoing a rapid transition to circularity7 that can serve as a model for other major ports worldwide.
According to a 2019 report by Chatham House8, the circular economy concept could – with the right enabling conditions – provide new opportunities for economic diversification, value creation and skills development. And it notes that developing countries are in a “strong position to take advantage” of these economic opportunities.
So, while at present developing nations lack the infrastructure necessary to implement the kind of widespread recycling and re-use programmes being set up in Europe, the potential is there. Things are beginning to change – with green shoots of opportunity in the circular economy starting to appear across many developing markets.
Green shoots
Starting at grass-roots level, there are promising developments across Asia and Africa in particular. In Tanzania, about 60 plastic recycling factories have been built, along with another 20 in Ghana and three in Ethiopia. In Vietnam, materials made from rice husks are being used to build fire-resistant, heat and sound-insulated houses. India is trailing the use of shredded plastic to increase road durability and provide an alternative to landfill.
While these projects form the building blocks of a potential circular future, the city of Almaty in Kazakhstan has gone a step further. In 2019, the city launched a comprehensive plan to develop a circular economy and leverage its key geographic position between Europe and East Asia to boost exports of the re-used and remanufactured products it creates.
For example, the city is developing a ‘closed-cycle farming’ and food-processing system that diverts organic residue away from landfill and processes it into fertilisers. Another scheme will collect metal and mineral manufacturing waste – as well as used items such as car parts, furniture and construction materials – for reprocessing into new products.
Cross-border momentum
Where the resources to develop large-scale municipal circular programmes are lacking, the answer may lie in building eco-industrial parks, where the means of production, recycling and re-use can be more efficiently self-contained within a single facility. Along with several European countries, China has taken a lead in industrial symbiosis, the “practice of ensuring that waste from one industrial process becomes a valuable input into others,” the Chatham House report noted.
Other similar initiatives are emerging elsewhere – with some taking projects beyond domestic spheres. The Global Eco-Industrial Parks Programme (by the United Nations Industrial Development Organization) has established projects in Colombia, Egypt, Indonesia, Peru, South Africa, Ukraine and Vietnam9. They have been created with circular economy principles in mind. In another example, the African Circular Economy Alliance was founded (in 2016) with the ambition to share best practices, undertake collaborative projects and advocate for the circular economy between members South Africa, Nigeria and Rwanda10.
“We are seeing the adoption of circular economic principles grow steadily across developing markets,” said Steven Cranwell, Head of Commercial Real Estate and Industry Groups at Standard Chartered. At the same time, “Shifting to this model can provide a boost to growth and employment in developing countries,” Cranwell added. “Infrastructure projects represent a unique opportunity for developing markets to take the leap to a circular economic future.”
The Bank is working with clients who are increasingly focusing on sustainable investment opportunities that play a key role in the development of a circular economy.
<BR>**No time to waste for waste and water management**
No time to waste for waste and water management
According to the United Nations, over two billion people are living with the risk of reduced access to freshwater resources. Nearly all of these people live in developing countries1. And by 2050, at least one in four people is likely to live in a country affected by chronic or recurring shortages of fresh water2.
The Covid-19 crisis may have drawn attention to the urgent need for building resilience in public health infrastructure. Yet long before the pandemic, water insecurity and sanitation were major issues for most developing countries. Access to these basic services remains among the greatest obstacles to future development.
Improving infrastructure and logistics in developing countries is seen as crucial not only to spurring domestic growth and reducing poverty3, but also to boosting efficient trade links across borders. Yet the current reality is that developing markets face extreme water stress levels that are a threat to future prosperity.
Of the 17 most water-stressed countries in the world, 12 lie in the Middle East and North Africa. Economic losses from water scarcity in these regions could reach 14 per cent of GDP by 2050 without major investment, a 2019 World Bank study found4.
Investing in water is “good business”, according to the World Health Organisation (WHO). The challenge is now to convince both public and private investors of this for water and waste projects – and ensuring this underlying infrastructure need is part of broader economic development investment in developing countries.
And for Standard Chartered’s clients across its developing-market footprint, the cost-benefit of such projects has huge potential.
Untapped opportunities
Despite the current concerns, developing regions present a host of “untapped opportunities” for investment in sanitation and water security, according to a 2019 World Resources Institute5 (WRI) study.
Oman, for instance, is ranked by the WRI as the 17th-most water-stressed nation on Earth, yet thanks to heavy investment in infrastructure the country treats 100 per cent6 of its wastewater and re-uses 78 per cent of it. With the help of international financing, other countries are beginning to follow the same path.
The Asian Infrastructure Investment Bank7 has been investing heavily in water and sanitation projects across developing markets. Project examples include:
- A USD100 million project to upgrade the water and sewerage system in Karachi, Pakistan
- A USD210 million project to extend the municipal water and sanitation supplies in Bangladesh
- A USD694 million programme to improve rural sanitation in Egypt
- A USD578 million project to rehabilitate and modernise Indonesia’s irrigation systems
In Africa, the Export-Import Bank of China funded the construction8 of the USD329 million 63-mile Ethiopia-Djibouti water pipeline as well as water wells and reservoirs to distribute potable water to 700,000 people in Djibouti, which sees only about 200mm of average rainfall a year.
According to a Standard Chartered report on global sustainable development goals, there is a USD125.4 billion private-sector investment opportunity in providing water and sanitation in emerging markets.
“The cost-to-benefit ratio of money spent on [emerging-market] water and sanitation projects can be as high as seven to one, as projects like wastewater treatment can generate significant benefits for public health, the environment and certain economic sectors, including tourism,” the Standard Chartered report said.
Waste-to-energy
Increasing international financing is also having a positive impact on waste management. While not a new process for developed markets, energy-from-waste (EfW) projects are now seeing a new lease of life in developing markets. Concerns over energy security and increased recognition of the environmental risks associated with previously dominant waste management solutions are creating new opportunities for the international investor community – according to law firm Ashurst9.
Southeast Asia is currently leading this renewed charge, with its EfW market heading for strong growth as urbanisation accelerates. According to Frost & Sullivan, revenue from the region’s EfW sector rose to USD1.85 billion in 2019, an increase of 65 per cent over five years10.
And according to a China Environment Chamber of Commerce study, investors can expect double-digit internal rates of return from EfW investments in Southeast Asia, compared with between 5 and 8 per cent inside China, for example11.
To date, these projects have largely been funded by government and/or multinational organisations. One of the most sizeable investments in Southeast Asia was led by HK-based China Everbright International, into Vietnam’s first waste-to-energy project in Can Tho. The EfW project – which also counts the Asia Development Bank12 as a project partner – now processes 400 tones of waste per day into 7.5 megawatts of power.
It’s not just Southeast Asia that is seeing progress, however. Thanks to significant improvements in the investment landscape in this area in the past decade (including tariff implementation, improved energy networks and greater government support) a number of large-scale EfW projects are now also being funded and built in Africa13. In one example, USD300 million is being invested in a waste-to-energy plant in Ghana – with expectations of creating 1,500 jobs14.
As in Southeast Asia, most African projects have been largely publicly funded. However, some governments in the region have already indicated their search for private partners for future projects15. This appears to be the case across developing markets – with evaluations of similar projects in Indonesia, Thailand, the Philippines, India and Brazil currently underway by private investors16.
A greater purpose
The effect of improvements17 in clean water access and waste management on people’s lives is difficult to overstate. Insufficient clean water impacts billions of people around the world, limiting access to work and education, causing disease and worsening malnutrition. Thousands of children die every week from preventable water and sanitation-linked diseases, and the daily task of fetching water prevents millions of women from being economically active.
Such investment has the added benefit of bringing employment opportunities to struggling communities in resource-stressed emerging markets, he added. For developing-market investors, the opportunity to ensure impressive returns while also doing good for communities is increasingly apparent.
The success of water-security and particular wastewater projects will be a key test of how financing from government and multilateral bodies can create a model for profitable infrastructure investments that subsequently draws in private-sector capital, creating a virtuous cycle.”
Sujay Shah
Global Head of CleanTech at Standard Chartered
<br><br><br><br><br>**Empowering people with jobs and education**
Empowering people with jobs and education
Covid-19 not only exposed the world’s economic fragility, it laid bare the inequalities between and within countries.
Those inequalities have long persisted in developing markets – yet the pandemic is deepening them, according to the United Nations1. As in the rest of the world, governments in these countries are broadly in the process of minimising damage to their economies and societies. For many, the immediate policy reaction is to protect the hardest-hit workers2.
Plugging infrastructure gaps has helped developing countries create local employment and reduce poverty. It has also enabled these markets with the physical connectivity to stimulate trade beyond borders. Broadly speaking, McKinsey estimates that every dollar invested in infrastructure can boost GDP by 20 cents in the long run, creating a socioeconomic return rate of 20 per cent3 through job creation and increased trade.
The pitfall is that these opportunities tend to disappear as soon as the infrastructure projects are finished. While more needs to be done to create a robust framework for education and longer-term job stability in developing markets, considerable progress is being made and the foundations for long-term prosperity are being laid.
Knowledge economy
Investing in education is the foundation of investing in talent – and this is reflected in the focus on formal education in developing markets in recent years. Equipping local labour forces with the skills needed to work on everything from transport to energy to agricultural projects results in job creation for locals in developing countries.
Technical and Vocational Education and Training (TVET) programmes have been established across Africa and East Asia, many of them in collaboration with the World Bank and the International Labour Organization (ILO). These programmes aim to “develop specialised and market-relevant technician training in transport, energy, agro-processing, manufacturing and ICT4.”
The establishment of the TVET programme in Kenya, for instance, is a critical part of the country’s strategy to build a modern vocational skills-training system. Professional skills training is now being conducted at 134 colleges and universities around the country. Meanwhile, the ILO-led Skills for Prosperity in Southeast Asia programme promises to improve the quality and relevance of TVET and skills development systems across the region. In Indonesia, for instance, the programme is helping people develop skills around sea transportation, port operations, ship building and repair, and marine tourism. In turn, this could enable Indonesia to realise the full potential of its maritime sector5.
Meanwhile, the ILO-led Skills for Prosperity in Southeast Asia programme promises to improve the quality and relevance of TVET and skills development systems across the region. In Indonesia, for instance, the programme is helping people develop skills around sea transportation, port operations, ship building and repair, and marine tourism. In turn, this could enable Indonesia to realise the full potential of its maritime sector5.
The COVID challenge
For all of their promise, Covid-19 exposed some of the limitations that plague TVETs. The pandemic caused the largest-ever disruption to the global education system. By mid-April, that affected 96 per cent of students across primary schools, universities, adult education programmes and TVETs6. Those in developing markets with less robust ICT infrastructure suffered the most.
A survey in mid-April showed that 90 per cent of TVETs across 63 countries were completely closed7. Measures to curtail the pandemic disrupted class, laboratory and work-based training as well as certifying exams. Yet, many closures were temporary. In some parts of Indonesia, Malaysia, El Salvador and Egypt, which have the necessary ICT infrastructure, closures were partial as the programmes adopted distance learning platforms.
Nearly half of TVETs surveyed indicated that their organisations committed additional financial and human resources to expand the use of distance learning, including video conferencing and virtual learning environments. As some countries roll back protective measures, the adoption and integration of such technologies could forever change the way learners engage with TVETs.
The Commonwealth of Learning outlined a blended learning framework to sustain the upskilling and reskilling of workers around the world8. The framework combines classroom learning, on-the-job training and, wherever and whenever possible, distance learning. The model promises to increase access to TVETs, though there’s a risk that some technologies required for distance learning would be prohibitively expensive for students.
For all of their promise, Covid-19 exposed some of the limitations that plague TVETs. The pandemic caused the largest-ever disruption to the global education system. By mid-April, that affected 96 per cent of students across primary schools, universities, adult education programmes and TVETs. Those in developing markets with less robust ICT infrastructure suffered the most.
TVETs and the new normal
While the pandemic endures, schools, businesses and childcare facilities around the world are cautiously reopening with health and safety measures in place. In turn, the need for people with the skills to uphold the “new normal” is rising. Here, TVETs could help to train professionals to reinforce such measures, prepare for and, ultimately, prevent future disruptions9.
The pandemic has emphasised the crucial importance of many practical service sector jobs. These essential workers include, inter alia, health care professionals, child and elder care workers, grocery store employees, logistics workers, and ICT support staff. TVET’s focus on practical skills, and its potential to deliver short-term, targeted and modular training can be harnessed to rapidly upskill workers in essential sectors and to reskill individuals to engage in the emergency response.”10
The World Bank
During the Ebola outbreak in Sierra Leone in 2014, for instance, the UN International Organization for Migration along with several other institutions established the National Ebola Training Academy. The academy trained 4,500 frontline and regular care facility workers including doctors, nurses, hygienists, lab technicians, swab takers, ambulance drivers, burial workers and decontamination teams on basic infection prevention and control11.
A medical journal later found that the academy contributed to controlling the outbreak12. TVETs could mobilise a similar response amid Covid-19.
The pandemic also spurred structural changes in the labour market, many of which are ongoing. Demand for digital skills is almost certain to rise, while the need for technical skills in public health as well as socio-emotional skills may also increase13. TVETs can help by rapidly identifying and responding to such skill needs.
While accessing TVETs amid the pandemic remains difficult in some places, it’s encouraging that many stand ready to adapt and rise to today’s challenges with support from some of the world’s largest institutions. Continued investment in education and skills training are necessary steps for economic recovery and future growth.
