Slow and steady: Asia's SRI market grows
Asia's green bond market is facing a familiar problem: plenty of potential issuers, too few investors. But the market is finding its place — and bankers are discovering ways to develop sustainable finance beyond just green bonds. Morgan Davis reports
eNatural disasters, record temperature drops, rising sea levels and other red flags are drawing increased attention to the realities of climate change around the globe. But the temperature of green bonds remains a function of the wider credit market.
Global green bond issuance hit $167.3bn last year, a 7.6% increase from the $155.5bn raised in 2017, according to Climate Bonds Initiative. The stunted growth was disappointing to green-watchers, given that volumes had jumped 78% from 2016 to 2017. But there was a glimmer of hope in the east, as Asia-Pacific had the highest level of increase for green volumes last year, with the $48.5bn raised, demonstrating 35% growth over 2017. Asian emerging markets, boosted by China, likewise saw the greatest rise of issuance in 2018, compared to other emerging markets globally.
But in general, bond issuance of G3 currencies fell in Asia last year to $275.5bn from $350.3bn, according to Dealogic.
“[The slowed growth of green bonds] was a reflection of the market trend,” says Chaoni Huang, director of green and sustainable solutions, investment banking, Asia Pacific at Natixis. “[The volatility] postponed some of the issuance until 2019.”
Experts are predicting that green issuance will pick up globally this year, closing in on the $200bn threshold. CBI has ambitiously projected $250bn worth of issuance for 2019, the same as it predicted for 2018. But a close look at Asian volumes in 2018 is enough to give hope.
For one thing, the rise in green bonds outpaced the wider market in some countries. In China, the bond market’s annual volume grew by about 5%, where green bonds grew by almost 8%, according to the International Institute of Green Finance at China’s Central University of Finance and Economics (CUFE). China is one of the biggest annual green bond issuers — second to only the US in 2018.
China’s market is being fueled, or perhaps solar-powered, by a raft of government initiatives that have encouraged issuance. For instance, China developed its own green bond standards for its issuers. It has also implemented environmental tax schemes to cut pollution. “We have reason to believe that markets like mainland China and Hong Kong will be a driving force in Asia Pacific and globally as well,” says Huang.
The numbers back that up. In 2017 only seven Chinese issuers sold green bonds in dollars or euros, according to Dealogic. In 2018 that number more than doubled to 19. But whether green bond issuance will continue to rise in the years to come will depend on a number of factors — not least of which is how the bond market overall fares.
“We are in a challenging market at the moment,” says Huang. “A volatile market effects everyone, green or non-green.”
Painting a bear market green
There is some good news on that front. Asia’s bond market has returned to life this year, with Chinese issuers in particular closing deals without any problems. Bankers and investors think that the resilience of the credit market will ensure that volumes remain strong, even amid volatility elsewhere.
“Bonds may be well positioned to benefit from volatility in the broader market, and as an asset class have traditionally been less risky than equities,” says Pierrick Balmain, head of Asia Pacific business development at BlueOrchard Investments. “People seem a bit cautious, and tend to slightly underweight equities and overweight bonds at the moment.”
As green bonds are generally priced in line with vanilla bonds in the primary market, a green label makes little difference for the average investor, says Huang. But specialist green investors can be brought into deals, adding another source of demand.
These specialist funds are part of the key pitch bankers make to their clients. Green bonds have the benefit of a slightly larger investor pool, as investors with sustainability-linked mandates can buy the notes but they cannot necessarily buy conventional bonds.
“There is a growing pool of money,” says Suzanne Buchta, managing director of green bonds at Bank of America “and [issuers] want to tap into this pool.”
These green investors also tend to be buy-and-hold investors, giving green bonds more stability in rocky markets. In the secondary markets, green bonds perform slightly better than non-green equivalents, to the tune of about 2bp, says Huang. It is difficult to prove green bonds’ ability to weather a poor market, but bankers interviewed by GlobalCapital Asia agree that the buy-and-hold nature of green funds would help them fair well.
“For investors they are better, of course,” says Dominique Duval, Crédit Agricole’s head of sustainable banking in Asia Pacific. “Because they have more information, they know how the issuer is doing with the money, there is detailed reporting.”
The nature of green bond issuers in Asia will help maintain issuance, says Yingzhe Shi, head of the green bond lab at China’s CUFE. Many tend to be government-linked names, meaning that a bear market won’t influence their funding plans as much, he says, adding: “They still need the bond market to raise money.”
One problem for Asia’s green bond market is a distinct lack of dedicated green bond funds. Demand for green bonds continues to come from Western investors, particularly European accounts, as the Asian investor base for sustainable products has been slow to develop.
“When we talk to investors, we realize there’s a knowledge gap,” says Natixis’ Huang. “It’s a learning curve that Asian investors need to work on.”
Duval agrees. “That’s a key challenge for now in Asia,” she says. “We have issuers, we have liquidity, we have regulatory bodies’ support… we also need some momentum and action on the investor side.”
One of the roadblocks for Asian investors is cultural, as there is a lack of understanding as to why green bonds are necessary. In Asia, “returns are still very important,” says one investor, “so a green bond really needs to not compromise that.” For that to happen, green bonds should price in line with conventional bonds from the same issuer, he says.
The next steps for Asia’s green bond market will rely on investors, especially if the credit market turns bearish. “In the past few years, Asian has been very much policy driven,” says Huang of the green bond market’s development, pointing to the top-down initiatives that bolstered growth in China.
“I think it will change in a bearish market, because there’s only so much a government can do in [such a] market.”
Market watchers seem to agree that a top-heavy, policy approach to building a green market can only go so far. Incentive schemes, like those introduced by Singapore and Hong Kong in 2017 to encourage issuers, help boost development initially, but demand for sustainability bonds needs to happen organically as well.
“The green market has been about the bottom-up and not the top-down approach,” says Buchta, speaking to the success and development of the green market in the west.
Growing alternative offerings
China continues to be the leader of Asia’s green financing efforts, but issuers outside of the country have become increasingly interested in sustainability products as well. In 2018, South Korean and Japanese borrowers established themselves as leaders in the space.
The Republic of Indonesia sold a green sukuk, making it the first Asian sovereign to do so. The country followed up with a nearly identical green trade in February 2019, establishing itself as a repeat player and leader in sustainability.
“It’s a testament of the success of the green bond market” to see repeat issuers, says Crédit Agricole’s Duval. But given the market slump last year, there needs to be momentum in Asia to spur on growth in 2019, she says.
Hong Kong may soon serve as a catalyst to that momentum. The island’s government has tossed around the idea of a green bond for nearly two years, and the legislature has recently given its approval for a HK$100bn ($12.7bn) green bond programme.
The first bond is expected to be sold in the first half of this year. “It’s something to watch, because government issuance will be vital for setting the tone for the year,” says Huang. “It will provide a lot of market confidence.”
Others agree. “What helps the cause is definitely the big, massive green issuances of nations,” says the investor. These headline-making trades create a lot of noise around green bonds, and encourage conversations, he says. For instance, when France sold its green bond in 2017, the country saw a 250% spike in issuance from the previous year from borrowers across the country, according to Dealogic data.
But not everyone agrees sovereign green bonds are the answer. Jolyon Ellwood-Russell, a partner at Simmons & Simmons, doubts that they make the ultimate difference in pushing for more sustainable financing. “The government is just the tip of the iceberg,” says Ellwood-Russell. The greatest impact will come from consumers pushing for goods that are produced and financed sustainably, he says.
Such moves are already being seen, with an impact trickling down to Asia. For instance, Nike and other major companies are making an effort to disclose environmental information about their suppliers. With such attention placed on the supplying companies, often in Asia, there will be demand for more sustainable behaviour, says Duval.
With these changes, new green markets have blossomed in the last 12 months. After Indonesia sold its first sovereign bond, Star Energy Geothermal and Sarana Multi Infrastruktur followed in the international and domestic markets, respectively. The Philippines also saw its first public green bond sale in January 2019, a $225m deal from AC Energy. The country’s national treasurer Rosalia V De Leon has hinted to local media that the Philippines is considering opportunities in green bonds as well.
“To see the Philippines getting involved… to see the green bond issuance spread beyond China, Japan and Hong Kong is really inspirational,” says Buchta.
Kookmin Bank’s Basel III-compliant tier two bond, sold with a sustainability label in January, was another significant move for the market.
It was the first bank capital deal in Asia to come with a sustainability label. “It’s a significant innovation,” says Nicholas Pfaff, senior director of market practice and regulatory policy at the International Capital Market Association (ICMA).
Many hope that the connection between bank capital and green financing will be replicated in the region, as banks have a significant emphasis on green lending. Globally, financial institutions make up about a quarter of green bond sales. “Bank issuances will continue to be an important segment,” says Huang.
Sprouts of success
It’s apparent that green bonds are just the start of sustainable financing efforts in Asia. Loans, for instance, are another growing segment of the green financing market. In March 2018, the Loan Market Association, together with the Asia Pacific Loan Market Association, launched green loan guidelines, largely in line with the internationally recognized green bond principles, triggering issuance in Asia. “Given that the capital market is volatile, a lot of these bilateral or club deals will be easier to manage,” adds Huang.
Green loans have the potential to change the market for banks, allowing them to develop portfolios that can be refinanced efficiently through green bonds, says ICMA’s Pfaff. The ability of borrowers to use green loans should boost the volume of green-labeled products more broadly, he says.
Ellwood-Russell says the next step for the industry is the trend toward a broader definition of “sustainable financing” that allows money to flow into projects and companies making sustainable efforts, not just explicit green bonds that so often line up with renewable energy.
“There’s no doubt that there is money that people want to put to work in sustainable finance but in terms of projects there really are not enough assets under the existing principles-based formula,” says Ellwood-Russell. “There’s only so many wind farms, there’s only so many solar farms.”
Governments will also be motivated to encourage the development of the sustainability market as they make efforts to fight climate change publicly, says Jay Lee, partner at Simmons & Simmons.
“The climate situation is getting more serious every year,” he says. “Governments will get pressure from the public to do something about climate issues, and if they do, there may be more momentum for issuers to sell green bonds and other sustainable financing.”
State efforts will need to move the market beyond green bonds to incentivise climate control and enthusiasm about sustainability from the bottom-up, says Lee, citing the example of China’s development of a booming electric vehicle market.
China also said last year that by 2020 all listed companies and bond issuers will have to disclose the environmental, social and governance risks associated with their businesses.