When ESG financing first began to make inroads in Asia, it was a funding route only open to companies that were fully green or sustainable from day one. That was great news for property companies and renewable power producers who found it easy to demonstrate that they had green assets, but it was more complicated for bigger groups or those in carbon-intensive industries, to show their green credentials. And while transition bonds and loans did emerge, the product found it hard to win widespread acceptance from the buy side.
The ESG financing space has developed quickly over the last few years with the market opening to include a broader set of sustainability products. Just two years ago, for instance, New World Development in Hong Kong sold Asia’s first US dollar sustainability-linked bond, heralding a new way for companies to raise debt with interest payments linked to credible ESG targets.
The use of sustainability-linked bonds and loans has rapidly grown in popularity and presented a financing conduit for carbon-intensive companies to fund their transition aspirations. They are either rewarded with marginally cheaper financing if they hit their sustainability targets or penalised should they miss them.
For borrowers using the sustainability-linked financing option, there is a tangible financial benefit to the transition.
The offshore market, especially in Europe, still offers the deepest source of ESG capital, but Asian local currency markets are also developing as more insurers, pension funds, banks, and asset managers respond to end-user demand for more ethical investments, particularly those that help the fight against climate change.
Investor demand is responsible for ESG financing entering the mainstream, with labelled bonds accounting for around a third of all new G3 bond issuance in Asia, and investors wanting to see clear sustainability goals even from companies that don’t sell green instruments. But there are still challenges ahead.
It remains to be seen how investors will react if any issuers of sustainability-linked loans or bonds miss their targets, or try to refinance them before the KPIs are measured. And investors are having to stay alert to avoid falling foul of greenwashing from companies that talk green but don’t walk green.
At the same time, mechanisms need to be developed to fund carbon-intensive companies’ transition to a greener way of doing business without causing an abrupt shock to local economies.
Issuers, banks and investors need to strike a balance between enforcing high ESG standards and ensuring that transition happens in a fair way for developing countries.
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