Asia Carbon-Free Plans Boost Outlook for ESG Credit Issuance

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Asia will need all the help it can get next year from more financing for environmental, social and governance projects, after recently setting some of the world’s most ambitious goals to end carbon emissions.

The region is the world’s largest greenhouse gas emitter, making the stakes for ESG bonds and loans all the higher. China pledged in September to go carbon-neutral by 2060. The next month, Japan said it would do so by 2050. The years sound distant, but the scale of the task means funding must ramp up immediately.

Asia Carbon-Free Plans Boost Outlook for ESG Credit Issuance

Issuance of bonds and loans earmarked for ESG projects slid about 12% this year in the Asia-Pacific region to the equivalent of $96.1 billion. That was due largely to declining green debt sales in China, previously a world leader. Social note offerings surged as authorities shifted their attention to the pandemic. Green loan volumes in APAC have fallen almost 47% to $19.8 billion. The drop in green finance contrasts with an increase in Europe and the Americas.

Cutting-edge designs could help boost the pace ahead. Overall, new ESG structures have been gaining traction, with the range of products expanding in Asia to include green interest-rate swaps. Another innovation that some borrowers may turn to in 2021 are transition bonds, which allow carbon intensive businesses to reduce their environmental impact even as they remain ineligible for ‘green’ labels.

Sustainability-linked notes, where coupons increase when certain ESG targets aren’t met, may also see further development after several sales this year. But the securities have prompted some investors to wonder if it’s really ethical to profit from a company missing its green or social targets.

While the menu of potential ESG financing options expands, one thing is certain. More money managers are trying to meet socially responsible mandates. That’s kept the cost of borrowing through such products lower compared with conventional debt in Asia, even as unprecedented monetary stimulus narrowed the gap this year.

Asia Carbon-Free Plans Boost Outlook for ESG Credit Issuance

Here are highlights across the region:

China

  • Market participants are monitoring for developments in ESG finance related to China’s carbon-free plans. Among them are projects involving natural carbon sinks such as vegetation
  • For next year, standardizing green finance is a major focus. A top official recently said China needs to require banks to reveal more carbon emission information
  • The country risks missing out on trillions of dollars of ESG investment flows because many companies don’t report enough data to show whether they qualify for the funds
  • A new alliance of financial associations in the Greater Bay Area including Hong Kong has been set up to increase funding channels for green projects
  • Hong Kong last month got the first interest-rate swap in the city linked to United Nations sustainable development goals

Japan

  • The world’s third-largest economy needs to ratchet up financing for renewable energy to meet its ambitious carbon-neutral plans
  • One focus is potential ESG debt offerings from utilities, after plans to reform electricity grid operations
  • The sustainable finance boom has attracted issuers including an oil refiner, a roadbuilder and a heavy machinery maker

South Korea

  • Along with Japan, sales of socially-responsible bonds from South Korea overtook China this year, as global issuance of debt to fund the fight against Covid-19 grew
  • Korea revealed a plan in July to expand energy efficiency, boost low-carbon power sources and foster green industries
  • Asset management firms are launching their first ESG debt funds, reacting to a surge in investor demand as President Moon Jae-in pushes ahead with clean energy development
  • South Korea’s corporate bond sales may rebound next year, fueled by a boom in socially-responsible debt, according to KB Securities Co., the No. 1 local-note arranger

India

  • Prime Minister Narendra Modi has maintained his goal of transitioning the country to clean energy from mainly fossil fuels, and expects 40% of India’s power-generation capacity to come from non-fossil sources within two years
  • Green loan volumes have more than doubled this year, one of the rare loan markets in Asia to witness this trend

Australia

  • Exporters from Australia, a top shipper of coal and natural gas, are positioning for carbon border tariffs as soon as 2023, as key trading partners set increasingly ambitious climate goals
  • A 69% drop in the amount raised for green loans this year pushed Australia into fourth place for such financing, behind Singapore, Taiwan and India

Singapore

  • While the size of ESG borrowings from the city-state remains relatively small, Singapore is trying to position itself as a green finance hub. It’s launched a grant program to increase access to green and sustainability-linked loans
  • Singapore needs to raise its auditing and accounting standards to foster confidence in ESG products, according to the central bank head

Southeast Asia

  • Indonesian borrowers have the most ESG debt outstanding of any Southeast Asian country, with issuance from power company Star Energy Geothermal (Salak-Darajat) this year
  • ESG borrowings from Thailand jumped more than three-fold this year to $2.4 billion

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