Sustainable hope

IFR SSA Special Report 2022
10 min read
Jonathan Rogers

Sovereign bond issuance from APAC in sustainable format is set to rise as the region’s countries aim to meet the UN’s SDGs by 2030. By Jonathan Rogers.

While ESG-aligned sovereign issuance from Asia-Pacific has been a notable recent trend as countries endeavour to move towards meeting the United Nation’s Sustainable Development Goals, immense challenges loom as the region struggles with deteriorating macroeconomic conditions and risk aversion.

The most recent eye-catching deal in the Asian sovereign ESG-aligned trend was the Republic of the Philippines’ ¥70.1bn (US$559m) multi-tranche Samurai offering, which priced in April and which demonstrated the country’s penchant for innovation, representing the first sustainable Samurai, reaching from five years out to 20 years.

Still, the deal apparently struggled to find demand amid the general risk-off mentality that has gripped offshore fixed income markets this year, together with a volatile domestic yen bond market, even though the long piece priced – somewhat unusually for the Samurai market – 2bp inside guidance.

Perhaps the takeaway from the Philippines deal as far as the likely direction of travel for the Asian ESG-aligned sovereign arena is concerned is its alignment with the International Capital Market Association’s Green and Social Bond Principles and the presence of a second-party verifier in the form of Paris-based Vigeo Eiris, a unit of Moody’s.

The ICMA alignment and second-party verifier raise a challenge: these represent what are increasingly regarded as essential elements if a sustainable sovereign deal is to cross the line in what is rapidly becoming a super-charged investment space when it comes to stringency and in particular an issuer’s credentials in achieving the SDGs.

To take a clear example: green bond issuance in APAC hit a record US$185.2bn last year, a massive surge on the US$85bn issued the year before. And, of this total, a hefty US$60.2bn was not aligned with international standards, such as the ICMA Green Bond Principles, according to the London-based Climate Bonds Initiative.

As best practice becomes de rigeur in the sustainable bond market, that non-aligned portion seems sure to diminish exponentially as the host countries of the most frequent issuers align their regulations with the EU's green taxonomy. Hong Kong and Singapore are leading the charge and other countries in Southeast Asia are moving swiftly in their wake and as China looks towards full alignment, with its EU-China Common Ground taxonomy.

“There has been a decisive trend away from use-of-proceeds issuance capital market transactions towards a more holistic view of an issuer’s KPIs in the ESG space – familiar sovereign issuers which can align their programmes with the SDGs and provide periodic reporting on impact have been easily able to get deals done in an era where there is much more scrutiny of ESG credentials at the country level,” said Kamran Khan, head of ESG for APAC at Deutsche Bank in Singapore.

The Philippines’ trade echoed its US$2.25bn three-tranche print at the end of the previous month, which again showcased the long-tenor sustainability theme, with a US$1bn 25-year piece brought in ICMA-compliant format against a nervous market backdrop of Federal Reserve quantitative tightening and war in Ukraine.

The fact that the Philippines decided on a long-duration tranche – at the longest tenor point the sovereign is allowed to issue – and was able to get it done convincingly in sustainable format is telling and suggests more of the same to come from the sovereign and its regional peers.

“Bookbuilds for sustainable APAC sovereign issuance have been significantly bigger than those for conventional deals, with lots of new names appearing in the book from jurisdictions which value alignment with international norms and won’t venture into non-aligned paper,” said Khan.

Ripe conditions

Moody’s nailed home the point for the prospect of rising sustainable bond issuance from APAC’s sovereigns in a report published in February, wherein it suggested that “conditions are ripe” for a flourishing of the product within the context of regional fiscal shortfalls, the need to address SDG and Paris-agreement net zero carbon emissions targets, as well as provide ongoing financial support to SMEs and households battered by the impact of the pandemic.

Moody’s predicted in the report that, in APAC, 19 countries will endure deteriorating public finances out to 2023 versus the period prior to the outbreak of the pandemic. Much of the required fundraising will be realised through sustainable bonds, said Moody’s, due to a post-pandemic focus on investment to achieve UN SDGs and major governments’ pursuit of net zero CO2 emissions targets.

Indeed, the SDGs are likely to sit front and centre of ESG-aligned sovereign fundraising from APAC. The Republic of Indonesia showed the way last October when it brought the region’s first SDG bond – a €500m 12-year. That label appeals optically, although the region’s sovereigns seem more likely to issue sustainable paper under the ICMA Green Bond Principles and Social Bond Principles, which were formulated in 2014 and 2018, respectively.

The ICMA principles were not applied to Indonesia’s SDG bond, nor were they applied to the US$4.3bn issue the sovereign brought in 2020 at the height of the pandemic, with use of proceeds specifically targeted at Covid relief.

Indonesia’s approach highlights the importance of multilateral development banks, underwriting banks and external verifiers to sovereign sustainable financing.

The republic received technical assistance from the United Nations Development Programme, HSBC and Credit Agricole for the SDG bond, while Cicero and IISD scrutinised the use-of-proceeds framework it had established under the auspices of the Ministry of Finance.

Matter of principle

Despite Indonesia’s “going-it-alone” approach, the ICMA principles undoubtedly represent the gold standard for sustainable issuance. As the international ESG-aligned investor base demands ever higher standards of stringency, those principles will become a baseline requirement for issuance.

“ICMA’s role has been to promote the credibility of the sustainable bond market,” said Mushtaq Kapasi, the Hong Kong-based head of ICMA.

“The principles are the benchmark standard for sovereign issuers, which also have a range of resources at their disposal, including MDBs, external verifiers and, of course, the underwriters. It is not just in relation to technical assistance, and in the latter case pricing and execution, but also about tailoring a sovereign’s overall environmental and social policies, and softer advice on assessing reputational risk.”

Covid-19 presented a watershed for ESG-linked SSA bond issuance from APAC, led by social bonds placed to address economic fallout from the pandemic.

In APAC, US$12.06bn of social bonds brought by government-linked agencies completed in 2020, before falling back to US$1.3bn last year and chalking up the same total so far this year, according to Refinitiv data.

Social bonds must fit social project categories, be aimed at a target population and achieve positive social outcomes. Similar to ICMA’s green bond framework, the association recommends follow-up reporting on the use of proceeds and a second opinion to verify the social benefits advertised.

“Metrics are more clearly understood in the green bonds space versus those in the social bonds space. It is easier to measure CO2 emissions than, for example, projects which aim at diversity, education or even health,” said Kapasi.

Sovereign surge

While most of the heavy lifting in APAC in social bond financing has been done by agencies, the bulk of ESG financing from the sovereign space in the region has come in green bond and sustainability bond format, with the former surging to US$7.8bn issuance last year, via five issues, from just US$750m in 2020, and maintaining a healthy US$2.5bn pace so far this year. Sovereign sustainability bond issuance this year is, at US$1bn, almost double the US$587m booked last year, according to Refinitiv data.

“One issue with regard to sovereign issuance from developing countries is that many of them are heavily dependent on fossil fuels and face steep challenges when it comes to a just transition, where the goal is to ensure that environmental projects do not have unintended or unacceptable social consequences,” said Kapasi.

As rising inflation, the lingering damage to SMEs from Covid and the pressure to meet the SDGs combine within APAC, it behoves regional government to step up with concerted sovereign labelled sustainable issuance. The pricing advantage is certainly there, as recent deals have shown.

“As demand from ESG-focused investors continues to rise exponentially and there is a relative scarcity of sovereign paper in sustainable format, Asia’s sovereigns will enjoy relative pricing power. We have seen ESG bonds pricing at a discount to the conventional pricing curve.

"This greenium of 5bp–10bp (the greenium is slightly higher for high-yield bonds) could well expand further thanks to that dynamic,” said Khan.

“Sovereigns represent a very different investment proposition versus corporates,” said Elsa Pau, founder of Hong Kong-based ESG proprietary analytics company BlueOnion.

“Nations have huge undertakings for the debt they issue, and the use of funds from the debt must align with the SDGs. Investors need to look deeper into the attributes being considered in these countries’ taxonomies.”

To see the digital version of this report, please click here

To purchase printed copies or a PDF of this report, please email