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Green bond market gains momentum across Asia-Pacific

Asia's green bond market
ESG-linked issuances are providing an additional source of deal flow for APAC bond markets.

Green finance is witnessing massive growth across Asia, as more government bodies, companies, and other institutions are considering environmental, sustainability and governance (ESG) issuances. The Covid-19 pandemic has boosted interest in stakeholders to benefit from sustainability investing, with governments across the APAC region rolling out green measures.

The rush to the green bond market in Asia comes at a time when global green bond issuance set an all-time record with a fund volume of $255 bn during the first half of 2021, nearly three times the first half 2020 levels, Refinitiv data suggested. During the period, the number of green bonds issued more than doubled to 650 deals. In H1 2021, Europe was dominant for regional growth in green bonds, where US$154bn of green bonds was issued. Country-wise, China with US$33.78bn of transactions and 136 deals was ahead of the US that registered a volume of US$32.76bn and 53 deals. The global volume could collectively exceed $1 tn in 2021, according to the Institute of International Finance (IIF).

Climate Bonds Initiative H1 2021 report also showed that total volumes for the labelled sustainable debt market in the first half of 2021, including labelled Green, Social and Sustainability (GSS) bonds, Sustainability-linked bonds (SLB) and Transition bonds, reached $496.1bn.

APAC thrives in green bond issuance

The popularity of green bonds – which raise capital specifically for climate and environmental-related projects – is still nascent but growing steadily in Asia over the past few years, with fund flows witnessing a sharp rise. As per a Barclays report, Asia-Pacific ESG bonds accounted for over 17% of total cross-border issuance during the first half of the year, indicating robust growth in volumes, products and issuer types in 2021.

Data from Refinitiv showed that issuance of bonds tied to ESG themes by Asia-Pacific borrowers more than doubled to a record $69 bn till June 2021. Green bonds accounted for 70% of total deals out of the region, while sustainability-linked bonds made up 20%. Where Chinese entities issued 51.3% of the ESG bonds, South Korea accounted for 21.2%. Overall, 234 ESG-linked bond issuances were recorded in the APAC region in 2021, nearly three times more than the same time frame last year.

According to a 2020 report by the international nonprofit organization Climate Bonds Initiative, nations from the rest of Asia have shown a rapid increase in green bond issuance, with the region recording a 53% year-on-year rise. As per the report, Southeast Asia’s banks from nations like Singapore, Indonesia Philippines, Thailand and Malaysia recorded record levels of green, social and sustainable (GSS) debt issuance in 2020, which hit $12.1 bn, up 5.2% from 2019.

In an S&P Global report, Amy Lo, co-head of global wealth management in Asia-Pacific and head and chief executive of UBS Hong Kong told the financial information provider that Asia’s wealthy next-generation families are giving stronger emphasis on sustainability and innovation, and are one of the key drivers for ESG issues in Asia, particularly in Greater China.

SLBs make debut into Asian bonds

Increased engagement in the sustainability-linked bonds (SLB) market was also recorded in Asia, especially in sectors like real estate, manufacturing and financial services. SLBs are being increasingly adopted by more and more corporates, which has allowed them to raise money for general corporate purposes while promising commitment to meet a defined set of sustainability targets over time.

Refintiv data suggested that global issuance of SLBs has ballooned to US$49.7 bn in the first seven months of 2021, after rising to $8.2 bn last year.

According to S&P Global Ratings‘ research published earlier in April, 68% of 2021 SLB issuances happened in the EMEA region, but the instrument is gaining momentum in Asia-Pacific and North America.

APAC pushes for green finance

According to the Institute of International Finance (IIF), although European and North American issuers have accounted for the bulk of ESG-linked financing issuance, the trend was also rising in Asia.

The growing momentum behind sustainability and green issuance across Asia also comes amid a growing investor appetite for sustainable and green-linked investments. A survey of 259 institutional clients in 14 markets across the Asia Pacific conducted by Citi Group during the first half of the year suggested that 22% of respondents chose green bonds among the top three sustainable and green finance instruments, that they were most interested in or exploring. Meanwhile, 42% of respondents chose ESG-linked working capital financing as one of their top three choices.

The surge in ESG debt issuance in Asia has been underpinned by nations work towards achieving net-zero goals and supporting the region’s transition to a sustainable future. To achieve the U.N.’s sustainable development goals by 2030, the Asia and the Pacific region requires an annual investment of $1.5 tn.

To drive further ESG debt issuance from the region, nations like China, Malaysia as well as Singapore are ahead in launching principles-based green taxonomy for harmonising their domestic taxonomy with global standards. This will therefore help investors better identify sustainable business and increase voluntary ESG reporting among companies.

Mobilizing capital toward sustainable objectives, Asia-Pacific governments, like Hong Kong, Japan and Singapore have also begun changing rules to force companies to better disclose their environmental impact and work towards reducing their carbon footprint.