Enhancing the Role of Regional Investment Policy in Promoting ASEAN's Green Growth

FDI Growth in ASEAN

The current trend of Foreign Direct Investment (FDI) flows into ASEAN has been encouraging. Based on the ASEAN Secretariat’s current, FDI inflows into ASEAN increased as high as 89% in the past decade from 121 billion US dollars in 2013 to 229 billion US dollars in 2023 (preliminary number). This makes the average annual growth of FDI even higher than the region’s average annual GDP growth of 6 percent. With such FDI performance, mobilising investment for SDGs such as those sectors related to climate action is not a far-reaching goal as investors and policy makers around the world have been increasingly given attention to climate change. However, progress on the alignment of investment flows with low carbon emissions pathways remain slow. This leaves high uncertainty on the feasibility of an alignment of financial flows with the Paris Agreement (IPCC, 2022)[1].

The region has been actively undertaking various initiatives to foster an investment-friendly environment through investment liberalisation, facilitation, protection and promotion initiatives guided by ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Investment Facilitation Framework (AIFF), as well as other investment-related agreements and initiatives with its trade and investment partners. While flows of investment that have contributed to positive economic growth may also have positive impact on sustainability, the available data may not provide straightforward facts.

The Green Investment Gap

Unlike the impact of FDI on innovation, technology transfer, or female participation, the impact of FDI on promoting green economic growth and decarbonisation is not straightforward. Based on OECD 2022 estimate[2] for domestic and foreign companies investing in 5 ASEAN Member States (AMS), foreign investors are typically generating more CO2 emissions per unit of output compared to domestic investors. In a particular AMS, the emission gap (CO2 emissions per unit of output) between foreign and domestic companies are even larger.

It is important to note that private investment funds are much needed to cover the high financing needs for decarbonisation given the current availability of public funds. According to the ASEAN 7^th Energy Outlook 2022[3], power expansion and target achievement for all ASEAN Member States throughout 2021-2025 requires investment of USD 184 billion on a Baseline Scenario.  This amount only accounts for around 16 percent of the estimated FDI inflows to ASEAN in 2023[4]. Given the tight budget constraints competing to meet several key challenges and targets, Innovations are required to scale up the availability of financial sources, including stronger collaboration with the private sector and international donors.

Addressing this issue is very urgent due to the lagging environmental progress as indicated in the ESCAP SDG achievement database, where more than 50% of the AMS are regressing in terms of SDG no. 13 on climate action, while almost all AMS are regressing in terms of SDG no. 7 on affordable and clean energy.  Moreover, four AMS countries are among the top ten countries in the world that are most affected by severe weather, namely Myanmar, Philippines, Thailand, and Vietnam[5].

Role of regional Investment agreements

Existing ASEAN regional investment Agreements have not been sufficiently accommodating the importance of green growth. ACIA and ASEAN Plus One investment agreements such as investment agreements with China (AC-IA), Korea (AKIA), and Hongkong (AHKIA) currently contained provisions related to liberalisation, facilitation, promotion, and protection in a general manner without specific emphasis on the importance of green sectors. These regional investment agreements did still reserve the right for implementing measures for public purpose as explicated in table 1. ASEAN should step up its efforts in providing more clear principles in facilitating green growth.

Table 1: Regional and Bilateral Investment Agreement Provisions That Possibly Have Implications on Environment

Measures	ACIA (2009)	ASEAN-China Investment Agreement (2009)	ASEAN-Korea Investment Agreement (2009)	ASEAN-Hong Kong, China Investment Agreement (2019)	Example of ASEAN Bilateral Investment Treaty Myanmar-Singapore (2019)
Feature	Expropriation and Compensation	General Exceptions	General Exceptions	General Exceptions	Preamble
Explanation	Non-discriminatory measures of a Member State that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute an expropriation of the type referred to in sub-paragraph 2(b).	Non-discriminatory adoption or enforcement by any Party of measures necessary to protect human, animal, or plant life or health, and relating to the conservation or exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption	Non-discriminatory adoption or enforcement by any Party of measures necessary to protect human, animal, or plant life or health, and relating to the conservation or exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption	Non-discriminatory adoption or enforcement by any Party of measures necessary to protect human, animal, or plant life or health, and relating to the conservation or exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption	RECOGNISING the important contribution investments can make to sustainable economic growth and development, and seeking to promote, protect, and facilitate such investments within the territories of the Parties. REAFFIRMING the Parties’ right to regulate and to introduce new measures, such as health, safety, and environmental measures relating to investments in their territories in order to meet legitimate public policy objectives

Source: ASEAN Secretariat

Based on UNCTAD IIA Issues Note (September, 2022)[6], as of 2021, there are still limited environmental feature in International Investment Agreements (IIAs) around the world. The existing ones covered the environment feature in two main parts which are carve-outs to expropriation, Fair and Equitable Treatment (FET) (35 agreements/treaties) and Prohibition of Performance Requirement (PPR) (30). There are only few that specifically mandates specific implementation of international environment obligations (5 agreements/treaties), promotion of sustainable investment (5), and cooperation on climate action (8).

There is no most ideal way to incorporate environmental feature yet, hence, there are currently many models of incorporating it. UNCTAD Policy Brief on IIA and Climate Action (2022)[7] called on policy makers to (i) Ensure that investment policy is consistent with, and proactively advances, national, regional and global climate commitments, (ii) Distinguish between high- and low-emission investments in IIA policy, (iii) Ensure that any investment protection standards safeguard the right and duty of states to regulate in the public interest[8].

In addition, policy makers could also (iv) Enhance the effectiveness and enforceability of environmental clauses in IIAs, such as investor obligations or non-lowering of standards provisions, (v) Realign with climate goals the existing stock of IIAs, by considering policy options including jointly interpreting treaty provisions; amending treaty provisions among others and (vi) Strengthen regional and global fora for continued dialogue and coordination on comprehensive IIA reform, and technical assistance programming on IIAs and climate action. Furthermore, a framework forenvironmental impact assessment (EIA) as suggested by OECD (2022) could be further considered. Right now, only several AMS has participated such as Indonesia, Laos, Myanmar, Thailand, and Vietnam through establishment of frameworks for strategic environmental assessment.

Recent initiatives

ASEAN has started its efforts to address climate change as reflected in AEC Blueprint 2025 (2015) and complementarities between ASEAN Community Vision 2025 and the UN 2030 Agenda on Sustainable Development (2015). Following the pandemic outbreak, the region adopted the ASEAN Comprehensive Recovery Framework (2021). References to sustainable investment is mentioned in this framework, calling for AMS to “..reassess its development strategies and plans with regard to sustainable investment” and stated that “..properly managed and implemented, sustainable investment will improve economic and social resilience to future shocks[9].

Through Key Priorities 5d, the region aims to promote investments that enhances environmental sustainability including a possible guidelines on sustainable investment. Relevant international frameworks and guidelines, such as the UNCTAD’s Investment Policy Framework for Sustainable Development, the OECD’s Policy Framework for Investment, and the OECD Guidelines for Multinational Enterprises, are specifically stated as reference for such guidelines. ACRF also made references to both investment and environment, such as the call to identify specific measures within AMS to support investments that deploy clean electricity sources[10].

Thereafter, the ASEAN Coordinating Committee on Investment (CCI) has conducted dialogues and discussions on this subject, including through organising an ASEAN Sustainable Investment Forum in November 2021 which leads to the decision to develop of guidelines on ASEAN sustainable investment as part of the committee’s deliverable for 2024.

The improvement in regional investment policy will complement the region’s other sustainability initiatives such as Framework for Circular Economy for the AEC (2023), ASEAN Strategy for Carbon Neutrality (2023), and ASEAN Blue Economy Framework (2023) which affirm the region’s commitment to green growth. In the financial track, the region also has developed the ASEAN Taxonomy for Sustainable Finance, ASEAN Green Bond-Linked Standard. Together with investment policy tools, these instruments would improve attraction of investments into impactful de-carbonising projects.

Furthermore, ASEAN Member States have been engaging in initiatives like Just Energy Transition Partnership (JETP) through cooperation with non-Dialogue Partner countries. The latter referred mostly to top sources for private energy transition investments, such as US, Germany, France, and UK (Bloomberg, 2021). In total, there are around USD 1 trillion worth of investments in energy transition in the world (2004: USD 32 billion). With the continuation of the abovementioned ongoing efforts on mobilising more climate friendly FDI, the region should be able to realise this potential.