Unlike China’s booming green debt market, Korea’s has grown rather slowly. Korea Export-Import Bank sold the country’s first green bond in 2013, the second did not appear until 2016, and 2017 was also slow. It was not until 2018 that issuers came to the market with vigour.
That momentum has continued. So far this year, Korean borrowers have sold more than $6bn of green, sustainability and social bonds in the public G3 bond market, according to Dealogic. LG Chem’s April transaction raised more than $1.5bn, making it one of the largest green deals of 2019. In contrast, Chinese borrowers have only sold $3.7bn of G3 public green notes year-to-date.
Part of Korea’s success has come from its issuers’ willingness to look at labels beyond “green”. Many have opted to use “sustainability” labels, which allows the proceeds to be applied to social and environmental projects, increasing flexibility for the borrower and investors.
The same can also be said for the types of green or sustainability deals being sold. Two Korean banks – Kookmin Bank and Shinhan Bank – have printed bank capital bonds with sustainability related tags. Kookmin’s additional tier one bond was a global first, and its tier two was the first in Asia. Shinhan followed with its own tier two bond tied to UN Sustainable Development Goals in April, also a first for the region.
Such creative and innovative approaches will develop the green and sustainable market. This market is not meant to be static, where “green” labels were slapped on conventional products. It is supposed to evolve to include new products that can reach different investors and issuers, depending on their needs. The fight against climate change is going to cost countries trillions of dollars, so there needs to be plenty of options for raising funds.
Korea has really stepped up its game in that respect. Not only that, its credentials as the most mature bond market in Asia, and one that is only behind China and India in size, puts it in a good position to develop the market further.
There are other advantages too. Investors in Asia have been slow to develop funds dedicated to sustainable products, in part because of the infancy of the market and confusion about how the products can fit within a portfolio. But because of Korea’s long standing relationships with US investors – and most issuers boasting investment grade ratings – borrowers are able to tap US investors too.
China’s market is going strong, of course. Including onshore green issuance, China easily outpaces Korea. But in the international market, the Mainland’s growth appears to have stalled. The Chinese government is yet to sell a green or sustainable bond, while, in general, issuance has tapered off due to the dearth of investment grade paper in dollars and euros.
In addition, most of the green borrowing in China has been led by the big banks, and have been keenly motivated by politics. China still has some way to go in comforting investors about the greenness of the funding that hits its market, with caveats like “clean coal” still accepted as valid use of proceeds under China’s green bond standards.
In contrast, Korea’s choice to sell a green-and-sustainability labelled bond this year – one of the few sovereign borrowers to do so – was a huge step for the country, and signalled its rising support for this market.
This is likely just the beginning, as Korea has a lot of opportunities to give a bigger fillip to the asset class. It can set explicit green and sustainability standards, guidelines and best practices for issuers. China has benefitted from having standards – even ones that include clean coal – as they encourage more borrowings.
Korea can also consider tax incentives and schemes to further the market, helping offset some of the added costs of obtaining green certification from a third party, as well as maintaining additional documentation to trace the use of proceeds.