The world needs the South-East Asian green transition, but is it willing to facilitate it?

South-East Asia is a critical region for the global economy. With a GDP of $6.36 trillion, Indonesia alone is the world’s sixth-largest economy, surpassing Brazil, France, and the UK. 

As a major global supplier, extractive industries dominate South-East Asian exports: palm oil, coal, and textiles are among the sectors that serve as the backbone of the regional economy. However, they are also the ones who have now become the problem children. 

The region’s rapid economic growth has proliferated its pollution and exhausted its natural resources, making South-East Asian suppliers incompatible with the growing demand from Western buyers for climate-friendly infrastructure and processes. 

Now, South-East Asia needs an estimated $210 billion in annual investment in climate-resilient infrastructure to support its green transition. More than half of that sum must come from private capital investment, and raising that capital is the challenge. 

The state of green trade finance in South-East Asia

Innovation is ripe in South-East Asia. The Association of Southeast Asian Nations’ (ASEAN) economy is projected to grow at a steady rate of 4.6% in 2026 and 4.7% in 2027, with the economy gradually shifting away from extraction-based growth. 

Green financing has not yet scaled in depth. For two decades, in Europe and the United States, the necessary investment for the transition has been generated through financial instruments, including: sustainability-linked loans (SLL), which offer financial incentives for meeting green targets; the World Bank’s green bonds, which raise funds for specific climate-related projects; and environmental, social, and governance (ESG)-linked financing, which integrates ESG criteria into the investment process.

However, in South-East Asia, these instruments are concentrated around a handful of large corporations that can access financing and meet stringent reporting requirements. 

Small and medium-sized enterprises (SMEs), the foundation of intra-regional trade in South-East Asia, are left out of the picture. . The phenomenon falls within a global trade finance gap – the $2.5 trillion global shortfall in trade financing, most acutely experienced by small businesses in emerging markets. 

And the problem isn’t just a lack of access to capital. SMEs also lack the infrastructure and the institutional capacity to deploy a green transition at scale. The fractured nature of ‘green’ policies across South-East Asian nations compounds that inequality.

Unlike the European Union (EU), which has implemented uniform policies and instruments regarding carbon pricing and emissions, as well as structured mechanisms to incentivise, ASEAN lacks clear, unified regulatory structures. 

Although initiatives such as ASEAN’s Sustainable Finance Taxonomies seek to harmonise the regional understanding of sustainability across economic activity and provide a common language for classification, fragmentation persists. According to a 2025 policy brief by the United Nations (UN) Environment Programme on ASEAN’s taxonomies, “For the financial industry, consistent and interoperable taxonomies help mitigate risks linked to greenwashing and fragmented criteria, thereby enhancing investor confidence and unlocking capital flows into sustainable investments.”

Despite efforts, five ASEAN member-states (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) have developed their own national taxonomies, and countries have diverging approaches toward sustainability objectives. 

This fragmented nature of green capital requirements means that increasing green financing in one country, such as Singapore, while operating in another, such as Indonesia, forces businesses to navigate overlapping regulatory requirements. 

Complying with Western markets’ requirements

The Carbon Border Adjustment Mechanism (CBAM) is the poster child for the EU’s climate strategy. The policy, which seeks to encourage cleaner industrial production in non-EU countries and to promote competitive carbon pricing, is a testament to the region’s commitment to combating climate change. However, the policy presupposes the ability of the EU’s supply chains to go green, even though many of them operate in countries that don’t have the financing or the resources to go green just yet.

CBAM is just one of several global initiatives aimed at strengthening global environmental protections. The No Deforestation, No Peat and No Exploitation (NTPE) initiative has set an international standard for agricultural commitments. Clothing brands like Zara have announced ambitious net-zero commitments. 

But these initiatives are a problem for South-East Asia’s ‘problem children’. Particularly, the extractive industries that serve as the pillars of Malaysia and Indonesia’s economies face intense scrutiny to transition in line with international regulations. In order to successfully transition, these sectors need urgent green financing, yet they are among those least equipped to access it. 

Most mid-sized corporations don’t have the systems to measure, let alone the capacity to report on carbon emissions across their supply chains. These businesses cannot self-finance the upfront capital necessary to transition to greener practices. The disconnected nature of ‘green’ regulations across ASEAN nations raises regulatory requirements and increases the capacity needed to access and manage financing.    

Even if these businesses can measure and track emissions across supply chains and navigate regulatory requirements, financing the green transition poses its own structural barriers. 

Local banks and domestic financial institutions lack the expertise to underwrite the transaction risks and advise clients. More damaging still is that international capital providers perceive South-East Asia as a region of emerging markets, with significant risk premiums that drive up financing costs. Risk premiums are added in relation to geographical positioning, regardless of the nuance of each financing opportunity.

The more embedded emissions are, the larger the transition needed. The larger the transition needed, the harder it is for sectors to access the financing required to support it. 

For now, that means most SMEs and the ‘problem’ sectors remain unable to comply with Western regulatory standards. Instead, regulations force businesses to absorb or pass on the costs of CBAM to consumers, or risk losing business altogether. 

A significant concern is that Western regulations will accelerate the emergence of a two-tiered trading system. Only large, well-capitalised exporters will remain competitive in European markets, consequently killing off the small and emerging players. 

A not-so quick fix

No single group of people, conglomerates, development banks, small businesses, or governments can facilitate the transition. 

The key to facilitating the green transition is leveraging a multi-tiered organisational hierarchy.

Local banks need to build meaningful financial capacity, beginning with product structuring and risk assessment. To do that, there must be systemic knowledge transfers between large Western financial institutions that have industry expertise with local banks in South-East Asia. 

Governments in South East Asia need unified frameworks and clear signals on green taxonomies and incentives, particularly regarding carbon pricing. Collaboration with other international organisations, such as the EU, to build parallel and integrated incentive structures that allow companies to follow clear transition pathways, is essential. 

Above all, financing is required. Multilateral development banks have a crucial role to play in encouraging regional private investment.  

To raise the annually necessary $210 billion, the Asian Development Bank (ADB) has established the Southeast Asia Green Finance Hub, which aims to leverage each $1 of sovereign capital to attract $5-6 of sustainable capital. 

Sovereign capital, particularly grant-based financing, is used to invest in initial high-cost infrastructure projects and energy transitions, or to provide a first-loss guarantee on investments. That lowers the investment risk, attracting private capital into the region. 

Without genuine financial support, without knowledge and technology transfer, and without capacity building, the green transition is dead in the water.  

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South-East Asia is no longer an insulated region. It is deeply exposed to geopolitical developments and global environmental pressures, and it’s at the heart of some of the world’s most critical agriculture, energy, electronics, and manufacturing supply chains. 

If the region cannot transition at the necessary pace, it won’t be limited to an environmental problem. It will be a global economic disaster. If regulation causes supply chains to break down, global supply chains will be left fractured. 

South-East Asia is a booming region, and it wants to transition. But its transition requires international effort, and the question is no longer whether the region can transition – it is whether the world is willing to finance it.