ASEAN ranked the 5th largest economy, valued at $3.2 trillion
NG Jiak See is seen while speaking during a recent event. Photo: Deloitte
Viewed from a political standpoint, the region is center stage, hosting major global events such as the upcoming G20 summit in Indonesia, and visits from government delegates from around the world.
On the innovation front, we are seeing more and more unicorn start-ups being born in the region, especially in the areas of FoodTech and FinTech.
The message to the world is clear – the spotlight is on ASEAN.
Over the past decade, ASEAN’s economy has developed rapidly, largely due to its unique geographical location and favorable business environment. In fact, ASEAN is currently home to four of the world’s fastest-growing economies – Cambodia, Indonesia, Singapore, and Vietnam.
As a single market, ASEAN is currently the 5th largest economy, valued at USD 3.2 Trillion, after the United States, China, Japan, and Germany. Furthermore, the region is on track to becoming the 4th largest economy by 2030, eclipsing Japan.
While ASEAN took a hit during the COVID-19 pandemic, it appears that the blow was not as bruising compared to other regions in the world.
Vietnam, for example, is one of the very few countries worldwide to have recorded positive economic results in 2020. As a whole, ASEAN countries managed to navigate the challenges with resilience and are bouncing back in steady recovery.
The outlook moving forward shows great promise for ASEAN; the region is expected to keep up its high GDP growth momentum and should be on course to overtake the bigger economies of China and the United States in terms of the rate of growth.
It has been projected that ASEAN’s growth will continue into 2030 averaging 5.3%, which is above the global norm.
ASEAN is fertile ground for trade and investments
Economic cooperation and integration are perhaps the most crucial pillars underpinning the region’s success and cohesion. ASEAN’s economic prospects rely on a set of significant and well-curated free trade agreements, and it appears that every economy wants a partnership.
The recent Regional Comprehensive Partnership (RCEP) agreement was signed in Hanoi, Vietnam in November 2020. This is the world’s largest free trade agreement that links ASEAN with China, South Korea, Japan, Australia, and New Zealand – countries with a combined population of 2.3 billion – covering 30% of global GDP and 28% of the world’s trade.
The RCEP is expected to greatly benefit ASEAN countries, potentially by up to $19 billion per year by 2030.
Where investments are concerned, due in part to its strategic geographical location, ease of doing business, tax incentives, and FTAs, ASEAN is currently one of the most attractive investment destinations for investors who are seeking to expand their global footprint.
The region’s FDI growth has been driven by strong investment mainly in Singapore, Indonesia, and Vietnam; these three countries received more than 80% of the inflows in 2019. That same year, ASEAN recorded the largest FSI inflow of any emerging market.
Although affected by COVID-19, by 2021, FDI into ASEAN had returned to pre-pandemic levels of $175 billion. Looking ahead, Vietnam plans to attract 50% of Fortune 500 companies into investment by 2030.
This trajectory is set to continue throughout the region, with the main goal of the ASEAN Community Vision 2025 being to further strengthen the capacity of member states to attract FDI in strategic industries.
Four megatrends driving growth and investment
Apart from the open financial landscape, what else is driving growth and investment in ASEAN?
Firstly, geopolitical shifts. The combination of rising labor costs, supply chain concerns, and geopolitical tensions are driving multinational companies to relocate a growing proportion of their manufacturing from China to ASEAN countries, in order to assert supply chain resilience.
Vietnam is the top choice in this exercise, contributing to Vietnam’s annual 6-7% economic growth over the past decade as companies consider factors such as overall labor cost, political stability, and social and cultural conditions.
A significant example is Apple relocating some of its AirPods production line from China to Vietnam in 2020, making the country one of the biggest beneficiaries of the “China+1” strategy of diversifying supply chains.
The second megatrend relates to digital advances. The extraordinary rates of digital expansion and digital ubiquity in ASEAN are helping to propel investment into the region.
Fun fact – ASEAN is the world’s fastest growing online market with online transactions expected to double to USD 73 billion by 2023 and the overall digital economy projected to hit USD 1 trillion by 2030.
Third is ASEAN’s changing demographics. Going hand-in-hand with digital advances is the merging middle class that embraces the online world and takes advantage of the greater opportunities that comes with it.
ASEAN’s middle class is projected to grow to 67% of the region’s total population by 2030 and the implications are significant – consumption is set to double by 2030, with high growth in sectors such as F&B, electronics, education, and transport. ASEAN is also home to a growing educated and young workforce; currently, 60% of its population is under 35 years old.
The last megatrend is ASEAN’s ESG (Environment, Social, and Governance) commitment and capabilities.
Emerging priorities to guide sustainable investment
Traditional investments used to be siloed into sectors, such as energy, manufacturing, and healthcare, each having its own strategic path, yet lacking a cohesive and unified long-term strategy.
Today, in the post-COVID-19 pandemic world, emerging priorities have been brought to the forefront, with the most significant being the Green Agenda, declaring that environmentally sustainable development is no longer on the fringe. It is the core.
Examples of market forces driving sustainable investments include:
Government regulations. Over the past three decades, there has been a 10-fold rise in the number of climate change laws and policies passed globally. There is a rush to comply and adapt, and there are expectations that more regulations will be designed to accelerate the transition to a low-carbon economy.
Investor expectations. Over 500 investors globally, who collectively manage more than USD 47 trillion in assets have signed the Climate Action 100+ initiative that aims to ensure that large corporate greenhouse gas emitters take action.
Consumer demands. Research has shown that more than 80% of consumers expect CEOs of consumer brands to be making more progress in reducing carbon emissions and single-use plastics.
Employee expectations. 78% of executives in a 2020 Deloitte survey indicated that their employees were very concerned about climate change. In another Deloitte survey, 45% of millennial employees said they would look to change jobs if their company did not implement sustainable business measures.
The reality is, if “business as usual” is continued as it is now, it will not lead to business as usual in the future. At Deloitte, we have posited that in Southeast Asia, and the larger Asia Pacific, there is a clear opportunity for the countries to lead the way and show how acting on climate change is not a narrative of cost but one of extraordinary opportunity and economic growth.
Southeast Asia, as a region, is sitting on $12.5 trillion opportunities that could materialize if action is taken now to invest in sustainable development.
Unlocking value with sustainable investments
There are already demonstrations of the value of ESG investment. Globally, assets under management in ESG-geared funds crossed the USD 1 trillion threshold in 2020, and over the past five years, ESG stocks outperformed the market by 88%. Big names are changing their entire business models to adapt.
Moving forward, given that market forces are prompting investors to reassign billions of dollars using an ESG lens, it can be expected that every deal will be scrutinized on ESG parameters. Private equity investors and businesses will need to embed ESG not only those geared to that end but across all transactions, if they are to curtail risks and deliver more value.
Within the M&A space for example, this means to base strategy, target identification, due diligence, valuation, integration, and value capture on material ESG components. For the foreseeable future, ESG-assessed M&A will be an important means to create growth, a competitive edge, and access to affordable capital.
ESG should now be regarded as a key lever of value – including establishing stakeholder trust, which is a determining factor in a companies’ feasibility to survive and thrive.
Where is ASEAN in this narrative? One can say that ASEAN is posed for success, given that its top sectors are receiving ESG investments. Increased levels of ESG investment are expected across the region, for example, energy in Vietnam, manufacturing in Indonesia, Thailand, and Vietnam, and mobility in Malaysia, Singapore, and Thailand.
All in all, ASEAN, acting now, can generate a cycle of positive outcomes. Sustainable financing will support improvements to existing infrastructure; which in turn unlocks new sustainable assets, which in turn furthers transition into a low carbon economy; which in turn increases investor trust in sustainable investments; which in turn enhances attractiveness to investors; which in turn allows sustainable infrastructure to gain access to more funding; and the cycle goes round.
How can leaders drive change?
First, the not-so-good news. Leaders struggle with short-term obstacles that impede future impact. The top five of these obstacles are difficulty measuring environmental impact, (2) insufficient supply of sustainable or low-emissions input, (3) too costly, (4) focus on near-term business issues/demands from investors/shareholders, and (5) magnitude of change needed is too large.
The real question here is: are these real obstacles or just low priorities?
There are disconnects between ambition and the actions companies are taking to help the planet, and at present, the top actions taken by companies are very low-hanging operational ones, such as using sustainable materials, increasing efficiency of energy use, using energy-efficient equipment, training employees on climate change actions, and reducing air travel.
This goes to show that companies are still less likely to implement actions that demonstrate that they have truly embedded climate considerations into their culture to effect meaningful transformation.
The harder-to-implement, needle-moving actions include developing sustainable products, requiring suppliers and partners to adhere to sustainability criteria, updating facilities, and tying senior leaders’ compensation to ESG performance.
While each organization, industry, and region need to customize its own sustainability strategy, these actions are important markets of leadership as they require a mindset that sees both risks of inaction and the opportunity of sustainability.
Connecting for sustainability
ASEAN is poised for sustainable success; the investment and economic outlooks for the region are strong. But for this success to happen, priorities need to be aligned with sustainable development.
Now, businesses in the region need to go full throttle and invest in needle-moving actions to create climate-leading societies that are resilient and ready to outperform and thrive.
For investors, the advice is to come in early, with now being the best time to seize opportunities before it gets more competitive; and stay for the long run, as sustainability is not going anywhere – it is our present and our future.
* NG Jiak See is Deloitte Asia Pacific Financial Advisory Leader