Mobilising ASEAN Capital Markets for Sustainable Growth

Executive summary

The Association of Southeast Asian Nations (ASEAN) is one of the most dynamic and fastest growing regions in the world. In the last two decades, the region’s real gross domestic product (GDP) has grown by 5% annually and its GDP reached USD 3.7 trillion in 2023, equivalent to 3.6% of the world’s GDP. As a group, ASEAN economies were the fifth largest economy globally in 2023, up from eleventh in 2000.

This rapid economic expansion creates important challenges, including significant financing needs among the region’s corporations and households, highlighting the need for efficient and resilient capital markets and financial intermediation. Well-functioning capital markets play a key role in supporting investment, innovation, job creation and in increasing the resilience of the corporate sector. Strong corporate governance frameworks are also essential to help businesses attract investments that translate into greater value creation and competitiveness, while also providing investors with appropriate safeguards. More dynamic capital markets and stronger corporate governance frameworks will be critical for ASEAN’s continued expansion.

This expansion will also be strongly influenced by developments in two rapidly evolving areas, Artificial Intelligence (AI) and sustainable finance. The adoption of new AI technologies, including in the financial sector, creates significant opportunities for ASEAN economies. For example, AI technologies can enhance productivity, improve customer experience, and enable targeted services. However, they also carry important risks for markets which must be properly managed to protect consumers and investors, market integrity as well as stability.

Sustainable finance is also growing in the region and environmental and social considerations are increasingly being integrated into the financing of corporate activities. One emerging area is the issuance of sustainable corporate bonds, which, importantly, can contribute both to long-term risk-adjusted returns and to climate and broader sustainability objectives. ASEAN economies are already implementing policies and frameworks to support the scaling up of sustainable bond markets, and ensuring their efficiency and transparency will be important to their further development.

Key policy considerations to support policy makers in managing evolutions in capital markets, corporate governance, AI and sustainable finance in the ASEAN region are outlined below.

Policy considerations

The corporate landscape and the use of capital markets

Market-based financing is growing across ASEAN markets. However, corporations continue to rely heavily on bank financing, with lower levels of investment in research and development compared to the rest of Asia. The penetration of both bank- and market-based financing also remains low in many ASEAN economies, a sign that businesses are facing financial constraints. Moreover, liquidity of both equity and bond secondary markets remains low compared to international standards. Policy makers should prioritise efforts to strengthen capital markets to increase investors’ participation and channel more capital to the business sector. This includes efforts to encourage listings by non-financial corporations, working towards the inclusion of ASEAN companies in investable indices to attract foreign investment, and promoting access to long-term financing via corporate bonds. Increasing liquidity of secondary markets is also essential to attract more issuers and improve investor confidence and participation.

Corporate governance policies and practices

Improved corporate governance frameworks in ASEAN economies will enable well‑functioning capital markets that support financing of the corporate sector. Policies should reflect the regional and national particularities of ownership structures and capital market conditions, especially when addressing risks and promoting positive outcomes such as sustainability and digitalisation. In particular, ASEAN policy makers should focus on promoting: effective oversight of publicly traded companies within company groups; effective engagement of institutional investors with listed companies; high-quality but proportionate sustainability-related disclosure; proper conduct of general shareholder meetings; effective board independence; and flexibility to establish board committee structures that best serve corporations’ needs, within appropriate safeguards for minority shareholders.

Artificial intelligence in finance

Policy makers should monitor the fast-paced evolution of AI technologies applied in finance, to allow the potential benefits to materialise while effectively anticipating and managing emerging risks without stifling innovation. Particular attention should be given to governance arrangements of AI-based models, data management, risks of bias and discrimination, as well as the identification and management of potential financial stability risks that can arise from the wider deployment of such models by financial sector participants. Additionally, policy makers could consider supporting research and development to address the lack of explainability and predictability of AI decision-making, as well as identifying emerging cyber‑security vulnerabilities, and ensuring that innovators identify, disclose and prevent dangerous or harmful capabilities of new AI models. To achieve these objectives, policy makers could consider using a risk-based, adaptive and human-centred approach to ensure guard-rails that protect consumers and markets are in place, and to future-proof the regulatory framework for AI in finance.

Sustainable bond markets

To encourage the development of sustainable bond markets, policy makers should focus on strengthening the regulatory framework to provide investors with trust in these products. This includes clarifying the rules about use-of-proceed stipulations and key performance indicators (KPIs) of these bonds; assessing the extent to which green, social and sustainability (GSS) bonds could be used to refinance existing projects that support sustainability-related objectives; encouraging, where appropriate, the use of contractual penalties to promote the proper use of GSS bond proceeds for sustainability projects; increasing the interoperability between Asian-specific standards for sustainable bonds and internationally recognised standards; and strengthening reporting requirements to ensure that metrics and methodologies are robust and decision-useful.