Asean struggles to jump on green bond bandwagon
A spike in Asian green bond issuance this year has not yet spurred the use of the instrument by borrowers in the Asean region, where the conventional debt markets already face challenges as they develop. But credit enhancements and strong precedents from neighbouring countries could help generate more green activity in southeast Asia, writes Christina Khouri.
In July, Chinese wind turbine company Xinjiang Goldwind Science & Technology printed the country’s first ever green bond. India, meanwhile, saw its maiden green issuance from Yes Bank in late February, which was followed by a deal from the Export-Import Bank of India a month later. More recently, in August, the International Finance Corporation (IFC) sealed the country’s debut green masala bond — or offshore rupee denominated notes.
But while activity has been spreading inexorably across the continent, green bonds have been largely non-existent in the Asean region. The exception has been a self-labelled green bond by Thai petroleum company Bangchak Petroleum, which was sold in February. Few details on the nature of the bond have been released, aside from a letter to investors stating that proceeds will be used for expanding the company’s renewable energy business.
Another deal may emerge, but it is not certain whether it will be a formal green bond. Philippine company Aboitiz Power Renewables is set to take a partial credit guarantee from the Asian Development Bank (ADB) to support a project bond. There is no guarantee that the deal will be certified green, but proceeds will be used to refinance the acquisition and rehabilitation of geothermal power plants.
Asean countries have not been making bold strides towards developing a green bond market. At the moment, the region is contemplating the broader topic of green financing, but it remains mostly chatter.
“There hasn’t been a lot of green bond activity, but there is talk,” said Sean Kidney, chief executive of the Climate Bonds Initiative (CBI), a not-for-profit advocating green bonds to fund climate change solutions. He added that these are mostly informal conversations.
“[There have been] some initial discussions from Vietnam [at the government ministry level], and we will probably see the first green bond there come from an SOE,” he added.
He said the Singapore government has also shown some mild interest in the instrument, as it views it as a way to position itself as a regional green finance hub.
Others agree. “In Singapore there is a fair amount of research at the university and government level for building green financing,” said Mushtaq Kapasi, chief representative at the International Capital Markets Association (ICMA) in Asia Pacific.
The Monetary Authority of Singapore (MAS) declined to comment on whether discussions on potential green bond issuance had taken place.
Interest is not just restricted there. In May, emerging market-focused investment manager ADM Capital introduced a “Rainforest Impact Bond” structure aimed at preventing deforestation. The company has since been in talks with the Indonesian government, where it hopes to pilot the programme.
ICMA’s Kapasi added that the Indonesian government was also working separately on green banking and funding for small and medium enterprises, with both green bonds and green sukuk on the horizon.
Malaysia is catching up to the trend too, with the country’s securities commission introducing a sustainable and responsible investment (SRI) sukuk framework in August 2014 to support issuance and investment in green and social impact bonds.
Malaysia’s sovereign wealth fund, Khazanah Nasional, has been the only issuer to use the framework so far, printing a MR100m ($27m) seven year sukuk in early June. Although the deal was not classified as green, proceeds will be used to fund efforts to improve accessibility to quality education in government schools.
GlobalCapital Asia also understands that Malaysia and the World Bank are working on a green sukuk, although a spokesperson for the latter declined to comment. The Securities Commission of Malaysia could not be reached for comment at the time of publication.
Introducing a novel instrument to the Asean region does come with a few hurdles, especially as green bonds are relatively new in the rest of the world. The first green bond was only issued in 2007 by the European Investment Bank. But while activity has picked up in Europe and the US since then, Asia has been slower to catch up.
“Maybe we are a bit hesitant at the moment because we don’t understand green bonds,” said one Malaysian banker. “Unless someone else can figure it out for us, I don’t think we will see much issuance.”
Lack of familiarity with green bonds is certainly one roadblock, but also posing a challenge is the fact that Asean borrowers are more reliant on bank debt. The Malaysian banker said that some domestic power companies already focused on climate-friendly projects might be interested in issuing green bonds, but it would be more likely that they would not need to issue a bond to finance the projects.
“There are some corporates looking at [developing] hydroelectric dams, but they are smaller ones and are more likely to take a loan rather than a bond,” he said.
Bank funding may also be an easier route for many issuers , especially as some of Asean’s bond markets are still developing and often do not see large deal sizes. For example, in the Singapore dollar market a deal that is only between S$100m-S$150m ($71m-$107m) is considered benchmark sized .
Other markets, such as Indonesia, still need to deal with more fundamental concerns, such as insolvency and bankruptcy policies, in order to make bonds more appealing to investors.
“The [Asean] markets themselves are not as developed — some of them are not that liquid and diverse,” said ICMA’s Kapasi. “There need to be bigger and deeper local bond markets to allow for such a niche instrument to take off.”
He added that the first issuers , aside from development agencies like ADB, could be banks that already have a green portfolio and expertise in green finance. When corporates begin to get involved, higher rated names directly involved in environmental industries could take part.
Markets like Malaysia and Thailand, which have more developed domestic bond markets as well as opportunities for renewable energy projects, are also likely to be paving the way for green bonds in Asean, reckons Thiam Hee Ng, senior economist within ADB’s economic research and regional co-operation department.
The growth of the market might be a slow process, however, and that is largely down to cost. “Investors ask for the same yield for plain vanilla bonds and green, but arguably issuing a green bond costs more because of audit costs and the cost of ensuring that the funds will really be deployed to the project being financed,” said one head of investor relations and business development at an environmentally focused investment firm.
Also, as only a small pool of Asian investors buy according to environmental, social and governance (ESG) mandates, it may be difficult for Asean issuers to reach out to new investors to support their deals, added ADB’s Ng.
However, there could be ways to stem those costs. Aboitiz Power is using a partial guarantee from ADB for its notes, and credit enhancements are expected to ease the way for more issuance.
“Most people currently looking at green bonds are looking for its price benefit potential,” said Kidney at the CBI. “We don’t expect substantial price benefits until targeted credit enhancements are more widely used.”
He added that organisations like IFC, the United States Agency for International Development (USAID) and the Overseas Private Investment Corporation (OPIC) already provide credit enhancements, but these are underused.
“There is a case to be made for having credit enhancements in this space,” added the head of investor relations and business development. “Many investors like to see them because they believe that big institutions have looked at these projects and it gives them a big incentive to invest.”
A source at a firm that provides credit enhancements to Asean corporates declined to comment on savings that might be achieved via a credit wrap structure.
“No one would issue using a credit guarantee if it didn’t make economic sense,” he said. “Either the guarantee provides some savings, or it would come in line with a standalone issuance and provide some other benefit.”
These advantages could include accessing new investor bases or bringing something innovative to the market. The ADB-backed Credit Guarantee & Investment Facility (CGIF) provides credit guarantees for corporates that want to issue such bonds denominated in local currencies within Asean+3 (China, Japan and Korea).
The facility could end up doing the same for names that are eyeing green issuance as well. CGIF told GlobalCapital Asia in January that it hoped to back a green bond as part of its efforts to introduce new types of notes in the region.
Activity in neighbouring countries within Asia might also ignite the spark of green bond issuance in Asean, as regional leaders like China and India start to form their own green markets.
“China will have a huge impact once its green bond market starts up,” said Kidney. “Even the new Asian Infrastructure Investment Bank (AIIB) has a clear green mandate. We can’t separate Asean from the regional context and there will be a lot of copycats as the market develops on its own.”