Nature-linked finance in Southeast Asia: implications and policy options for regulators, lenders and borrowers

Southeast Asia’s economies sit at the epicentre of nature risk. Tropical forests, mangroves and river basins — which regulate water flows, store carbon, and support biodiversity — underpin food security and export revenues, yet unchecked deforestation, biodiversity loss and water scarcity threaten to significantly cut regional gross domestic product in the coming years. Recent floods in Malaysia and extensive loss of forest cover in Indonesia have triggered billions of US dollars in damages and liability costs, elevating credible nature-linked finance from a niche instrument to a macro-stability necessity. Sustainability-linked finance (SLF), which links a borrower’s interest margin to its progress against clear, verifiable environmental or social performance targets, has emerged as the flagship vehicle for translating sustainability ambition into capital flows.

Using data from SLF deals and nature-related key performance indicators (KPIs), the authors combine market statistics, network analysis and an AI-assisted review of corporate reports to examine how nature-aligned finance is being mobilised in Southeast Asia. The findings highlight significant potential to scale up such products, but also reveal a persistent gap between corporate disclosures, loan covenants and global standards, which may increase greenwashing and pricing inaccuracy risks, potentially undermining investor confidence and limiting capital flows to nature-positive projects.

Recommendations

• Reduce lending risks for nature-positive projects. Ministries of Finance may wish to deploy targeted fiscal and prudential incentives in tandem, attracting private capital towards high-integrity SLF. They might also explore options such as tax relief for retail investors or tax credit coupons linked to verified KPI milestones, thereby reducing coupon spreads on nature-linked bonds. Central banks could reinforce these incentives through partial credit guarantees or concessional refinancing windows that offer cheaper capital for loans meeting the agreed taxonomy. An ASEAN sustainable finance taskforce may wish to coordinate these efforts.
• Create one agreed list of nature-related metrics for the region so reporting is consistent. The ASEAN Capital Markets Forum could spearhead the development of a shared taxonomy of nature-related KPIs. This would help turn today’s patchwork of water- and waste-focused indicators into a balanced suite of outcome-based metrics. A phased implementation, underpinned by targeted capacity-building for regulators in lower-income member states, could keep compliance costs manageable while steadily enhancing transparency.
• Make sure that at least half of sustainability performance targets match what companies already report. Supervisors might underpin a ‘50% rule’ with light-touch yet credible measures, such as modest administrative fines or accelerated re-verification, mirroring the graded approach used in the EU Green Bond Regulation. As data systems mature and third-party assurance becomes more economical, the threshold could be raised incrementally.
• License and monitor the experts who set SLF targets. Regional financial regulators could establish a licensing regime for those who help set and verify the environmental and social targets in SLF deals. Financial institutions acting as lead arrangers and advising on KPI selection and target-setting in SLF might obtain a regional licence, awarded based on proven expertise in Taskforce on Nature-related Disclosures-aligned metrics, robust conflict-of-interest safeguards and independent data-assurance practices. The model could mirror the EU’s oversight of second-party opinion providers while reflecting ASEAN’s bank-centred landscape: licences renewed every three years, random deal audits and public disclosure of quality scores. Such a framework would link market influence to verifiable diligence standards.