Green bonds may be emerging as the Next Big Thing in Europe and the US, but in Asia the idea has so far been greeted with a fair dose of cynicism. Only a handful of issuers in Asia Pacific – predominantly banks – have launched bonds under the Green label, and few of the region’s homegrown investors have embraced the concept of responsible investing.
The seeds, however, are there for the future. China is ramping up efforts to introduce a framework for Green financing that will include Green bonds as one of its key components. India is pushing hard to generate more energy from solar power. Both are vast markets with enormous funding requirements – and enormous potential.
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China, the world’s biggest emitter of greenhouse gases, needs to transition away from dirty power and heavy industry, and any instrument that helps create a new class of socially responsible Chinese investors has to be a worthy initiative.
Delegates at IFR Asia’s first Green Bonds Roundtable, held in Singapore in late June, heard about the challenges and opportunities in developing a Green bond market in Asia from a panel of market participants, including issuers, arrangers and the head of the Climate Bonds Initiative lobby group.
Two of the speakers made the long trip from Europe, and provided a clear picture of the contrast with the far more advanced European market, where more investors are demanding climate-sensitive investments. Norway’s vast sovereign wealth fund is talking about ditching its coal investments, and pension funds in Denmark are asking members to vote on removing fossil fuels from their portfolios altogether. Asian fund managers are a long way from that kind of conversation, although interest is certainly growing.
The main hurdle to convincing issuers to go Green – as is so often the case in Asia – is cost. Credit spreads on a Green bond may be flat to a conventional financing, but issuers need to hire more consultants and must update investors on their use of proceeds until the notes mature. So far, few Asian issuers are prepared to shoulder that kind of burden unless they can shave a basis point or two off their cost of funding in return.
Policy banks in South Korea and India are already helping to set the standard, and delegates heard some striking predictions of the volumes of Green issuance planned from China’s state-owned lenders once the country’s regulations come online.
Government incentives have the potential to ignite markets such as China and India, and it is likely that China’s Green financing model will include a fair amount of regulation to stimulate issuance and penalise bad behaviour.
At this early stage, panellists voiced concerns over liquidity and transparency, especially if Asia’s Green capital market develops beyond the top rungs of investment-grade credit and corporate issuance takes off. Governance has long been a worry, and recent bankruptcies in China’s solar sector just go to show that a Green label is no credit guarantee.
The ultimate objective of the Green bond market, of course, is to accelerate a global transition to low-carbon living. That cannot be achieved without global engagement. Sooner or later, Asia has to play its part.
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