In an era marked by rising geopolitical tensions, the world is experiencing a shift towards “slowbalization,” a phenomenon characterized by the fragmentation of global economies into different blocs. Such fragmentation has profound implications for investments, including sustainable investments, with over 70% of sustainable investments directed toward countries that share a similar geoeconomic orientation. A recent ACI study examines the influence of geopolitical fragmentation on sustainable investments landscape, with a focus on Association of Southeast Asian Nations (ASEAN).

Geoeconomic fragmentation (GEF) has emerged as a defining characteristic of the current investment landscape, reflecting a policy-driven reversal of global economic integration guided by geopolitical motivations. This fragmentation is translating into economic effect through the financial channel and especially investments due to uncertainty and risk aversion. For instance, US and EU investments are being redirected from traditional powerhouses like China to more politically aligned nations as a strategy of ‘de-risking’ and ‘friend-shoring.’

The impact of GEF extends beyond international financing, influencing climate action efforts. ASEAN is positioned as a key player in the sustainable investment landscape, with significant potential for renewable energy and clean technologies. However, according to the World Economic Forum, an estimated $150 billion annual clean energy investment will be needed by 2030 for ASEAN to be on a Paris-aligned trajectory, but investments have so far fallen short. Although sustainability investments are expected to continue growing rapidly, it might not be immune from the impact of geopolitical tensions. Highlighting the vital role of private capital in green transition, the authors use venture capital (VC) investment data from CrunchBase to examine the extent to which that geopolitical tension fragments the sustainability-related investments, and the potential opportunities or risks presented to ASEAN countries.

The study classifies countries into two main blocs based on their similar voting patterns in the United Nations General Assembly: Bloc 1, which includes leading economies like US and Western Europe, and Bloc 2, comprising mainly developing countries like China. During the period from 2018 to 2022, sustainable venture capital investments predominantly originated from Bloc 1 countries, which accounted for over 75% of these investments and that share exhibits a rising trend overall(Figure 1). Notably, Bloc 2 sees an increasing trend in self- investment, with the share of intra-bloc investments rising from less than 10% in 2018 to over 15% in 2022. Within Bloc 2, ASEAN (excluding Singapore) had only sustainable investments from Bloc 1 countries until 2018, but after that, the region has attracted a significant share of sustainable investmetns from other Bloc 2 countries outisde the region too, consitent with the region’s more neutral standing amid rising geoeconomic fragmentation. ASEAN also stands out for being the Bloc 2 economy with the highest within-bloc growth rates, both in terms incoming and outgoing investments. This reflects ASEAN’s critical role in facilitating cross-bloc financial flows in sustainability ventures.

Within ASEAN, Singapore stands out as a regional financial hub, with over 60% of the nearly 140 sustainability-related regional investments in 2022 flowing into the country. However, in recent years, both Indonesia and Vietnam have seen significant growth in their deal shares since 2017 and 2020, respectively. Despite these developments in the region, Singapore remains a top regional investor that facilitates connections across both Bloc 1 and Bloc 2. The city-state experienced positive growth rates in sustainability-related investment outflows to all major economies in Bloc 1 and 2, except South Africa and Russia, across the last decade. This investment growth in outflows from Singapore to nearly all other countries is also consistently larger than from the rest of ASEAN, despite their much larger economy size.

This study highlights the complex interplay between geopolitical fragmentation and sustainability investments in ASEAN. ASEAN’s unique position allows it to leverage strategic advantages to attract sustainable investments to foster a greener economy amidst global challenges. By creating a supportive policy environment, the region can enhance its role in driving the global green transition while navigating the intricacies of geopolitical tensions.

By XU, Ni Scarlet

Researchers: LIU, Jingting and SENGSTSCHMID, Ulrike