REFILE - Asia's ESG bond market thrives
Asian issuers and investors are embracing environmental, social and governance related bonds, setting an issuance record that many are already expecting to be broken in 2022.
Sustainable bond issuance in US dollars and euros from issuers in Asia ex-Japan hit a new high of US$85bn last year, according to Refinitiv data.
"2021 was a record year for the sustainable finance market, and we expect 2022 will be another one,” said Antoine Rose, head of sustainable banking for Asia Pacific and the Middle East at Credit Agricole.
HSBC predicts supply will reach US$1.4trn globally in 2022, with green bond issuance up 60% at US$800bn. Asia ex-Japan US dollar-denominated bond supply is projected to reach US$120bn–$140bn, almost twice the volume of 2021.
Markets like China and South Korea, which have been very consistent with their ESG issuance, will continue to lead supply, said Chaoni Huang, head of sustainable capital markets for Asia Pacific at BNP Paribas. But the additional issuance from India, Indonesia and Australia last year sets those markets up for growth as well, she said.
Last November's United Nations Climate Change Conference saw countries renew and expand their commitments to decarbonisation.
"The commitments are fresh. The governments will need to take concrete action,” said Rose. “Sustainable finance is a good tool to … demonstrate commitments and communicate broadly to financial markets.”
Governments in the region have already added more incentives for green finance. The People’s Bank of China, for instance, late last year announced a new lending programme that will provide cheaper financing to firms working on green causes. The Bank of Japan in December extended about US$18bn of zero-interest loans to banks that disburse green and sustainable loans.
“The market has been waiting for strong financial support for a long time,” said Luying Gan, head of sustainable bonds, debt capital markets Asia Pacific at HSBC. “There is more variety of incentive methods, such as grant schemes, but the market is looking for more.”
Expanding demand
The introduction of the Common Ground Taxonomy – guidelines that outline the similarities and differences between European and Chinese standards for sustainable bonds – should help further growth, bankers said. China Construction Bank sold the first US dollar bond under the taxonomy in December.
While there are still different approaches toward sustainable investing globally, the needs of global investors have created an environment where Asian issuers must often consider what European investors want. Most recently, Europe has tried to add nuclear power and natural gas to its list of green investments, which will potentially allow more Asian issuers to sell green bonds, said Rose.
"It furthers the debate of what is energy transition and what kinds of technologies and additional capacities are needed,” said Rose. China will find great potential for green-related issuance pegged to natural gas as it transitions away from coal, he said.
Borrowers may choose to tap into more specific initiatives, such as biodiversity, adding fine-tuned focus to a green labelled bond, said Huang. “We expect focus on decarbonisation and net zero in the bond space,” she said. “This year onwards, more attention will be paid to biodiversity.”
Similarly, corporate diversity and inclusion efforts may be translated into key performance indicators that could be tied to sustainability-linked bonds, said Huang.
Investor scrutiny
As ESG has become more mainstream, investors have become more critical of issuers, questioning ESG policies and practices, even when a company is selling a conventional bond. Those that do sell ESG-related debt will need to be prepared for pointed questions about the impact of their trades.
"What you’re probably going to find is a refinement in terms of how investors are incorporating ESG into their investment decisions, rather than any major breakthroughs in 2022. Investors are getting more savvy,” said Derek Armstrong, head of debt capital markets for Asia Pacific at Credit Suisse. But borrowers that attract investors to their ESG trade may see a price benefit of up to 15bp, he said, as oversubscription leads to more price tension.
Jim Veneau, head of Asia fixed income at AXA Investment Managers, does not expect much “greenium” benefit for issuers. Indian renewable credits, for instance, are already expensive, he said, while Chinese high-yield property issuers that have sold green bonds still present credit risks. “At some point, I think there is going to be a bit of pushback,” said Veneau.
And investors are concerned about “greenwashing,” said Rose, requiring companies to be transparent with investors.
Gan at HSBC said she expects more conversations in 2022 that go deeper, looking for the impact of the bonds and the issuer beyond just the written use of proceeds in a term-sheet. “It makes the focus of my job change as well from focusing on transaction structure to also advising clients on their climate proposition and transition plan,” said Gan.
While the ESG market has progressed in Asia, it still falls short of European developments, which have seen broader integration of ESG considerations, said Veneau.
He believes the next step for ESG in Asia will be more focus on social and governance topics, to catch up with the interest in climate change.
“The ‘G’ has really wreaked havoc on China in particular,” said Veneau. Governance problems were put in the spotlight in 2021 as some companies revealed off-balance sheet debt and other questionable practices. “I think there’s an opportunity for governance to be a priority, and that should be investor-driven.”