Asian companies have been embracing climate change initiatives and green frameworks with vigour this year. Nothing shows that more clearly than the rapid growth in the region’s environmental, social and governance dollar bond market — which looks likely to exceed conventional bond volumes.
So far in 2021, borrowers from Asia ex-Japan have issued $56.3bn of ESG bonds, just trailing the $57.4bn in conventional bonds, according to Dealogic. This year’s ESG issuance has rocketed 147% from last year’s $22.8bn worth of dealflow.
In 2017, $7.7bn of ESG notes were issued in Asia ex-Japan, which stepped up to $13.3bn in 2018 and $22.5bn in 2019, according to Dealogic.
As ESG bonds increasingly become part of mainstream financing, bankers and investors expect issuers to give more preference to these instruments to help them meet climate change targets.
“If somebody would have told me this one or two years ago, I simply wouldn’t have believed it,” an Asia DCM head told GlobalCapital Asia this week, referring to the record green bond sales in 2021. Of the total offshore bond deals arranged by his bank for Asian companies since mid-November 2020, green deals account for over 35% of the volume, compared to over 15% in the same period last year.
A combination of regulatory pressures and the need to diversify their investor base, and sometimes, even the fear of being left out, has prompted borrowers to join the ESG race.
Global and regional investment banks have played a key role in educating borrowers, sovereigns and their own internal staff on the importance of adopting initiatives focused on combating climate change. Progress was initially slow, but has ramped up impressively in recent years.
“The encouraging thing has been the astounding speed at which the conversation on ESG has shifted in just a few short years,” Jonathan Drew, head of ESG solutions at HSBC, told GlobalCapital Asia. “This is an issue for every client we speak to now, and a priority for many. And in our latest ESG investing survey, 96% of issuers in Asia said they have increased their ESG focus in the last 12 months.
“The climate risks for Asia are particularly acute, to the extent that most corporates are already factoring them into their financial, operational and strategic planning. So I’m very encouraged.”
Firms in Asia are no longer just focused on selling green bonds — long a mainstay of the ESG market — but are increasingly focusing on bringing out novel structures to deepen the market further.
Last week, for example, Bank of China printed a $300m three year unsecured sustainability re-linked note offering, the first of its kind in the world. The conventional notes’ bond coupon is tied to the ESG performance of a pool of underlying sustainability-linked loans, as reported by GlobalCapital Asia.
The region has also seen a host of sustainability-linked deals, social bonds and transition bonds over the past year.
While Chinese borrowers have been big in the ESG market, firms from Vietnam, India, South Korea, the Philippines and Indonesia have also helped boost the market, despite differences in the nuances and metrics they adhere to.
This dealflow is only set to grow. India surprised the world this week by committing to become net-zero by 2070. Indonesia also said it could phase out coal-fired power plants by 2040, provided it gets sufficient financial support internationally.
Role models
The good news is ESG financing has flourished and improved transparency to the benefit of investors.
“Continuous efforts to enhance the disclosure quality of issuers would [further] support the development of sustainable finance in Asia,” Antoine Rose, head of sustainable banking for Asia Pacific and Middle East at Crédit Agricole, told GlobalCapital Asia.
On the top of that, commitments towards sustainable development, and in particular, ambitious decarbonisation pathways, are equally important to meet investor demand to efficiently contribute to the low-carbon economy, he added.
Like many of its global peers, the French bank has been ramping up in this space. Ahead of COP26, Crédit Agricole committed to increase by 60% its exposure to low carbon energy by 2025, said Rose.
Senior bankers say their discussions with finance heads at Asian companies have drastically changed over years.
“Initially, we were asked to suggest a reasonable green framework, but now the same issuers come back and ask us if their framework is reasonable enough [compared to global standards],” said a Singapore-based DCM head.
Not only this, some marque borrowers that always got away with no or covenant-lite bonds are voluntarily offering ESG covenants. “These conversations are music to my ears,” the DCM head said.
From steel and the power sector to telecom to real estate, every issuer has some plan to meet climate change needs. Capital markets will play a key role in that fundraising.
For instance, Plaza Indonesia Investama is marketing a debut five year non-call three dollar Reg S sustainability-linked bond. The Indonesian borrower aims to certify at least two of its malls as green properties by 2024 from a 2020 baseline of zero green properties.
“Capital markets have a critical role to play in financing the climate response,” said HSBC’s Drew. “Asian governments are already tapping into investor appetite to raise large volumes of funding for their national transition programmes. The capital markets are also an important source of funds for multilateral development banks to support green infrastructure development in the region.”
Drew added that bank issuers are an “important bridge” as they issue green bonds in capital markets to finance bilateral green lending to smaller businesses, often at cheaper rates than standard loans.
Among corporations, Drew points out that sustainable issuance is not just for sectors like transport or energy, where suitable use of proceeds might be more obvious. Rather, “the advent of sustainability-linked bonds in particular has opened this market to all sectors, and given businesses from real estate and hospitality to tech and food production an opportunity to tie the cost of borrowing to greener everyday operations”, he said.
Additionally, it has become evident recently that many lenders, especially those with global footprints, have cut exposures to dirty sectors, forcing companies to make decisions around transitioning their business models.
With investors also relying more on ESG factors, Asian companies have undergone a change in mindset. Yet, gaps remain and mere acceptance of change is not enough.
Great expectations
“Although many companies in Asia have taken the first step of the journey towards net zero, we think simply setting emission reduction targets is insufficient,” Louisa Lam, a Hong Kong-based credit analyst at HSBC Global Research, said in a note last week.
HSBC, which introduced its new climate framework for Asia bonds ahead of COP26, emphasises on focusing on quality. This means measuring the effectiveness of green targets in relation to what is needed to keep warming to 1.5 degrees.
The key metric that HSBC’s framework takes into account is a borrower’s medium-term reduction targets. The research focused on five key sectors in the Asia dollar bond universe: electric utilities, steel, property, technology and telecoms.
By default, Asian companies have bigger carbon footprints than their global peers, and hence are expected to be more aggressive on their climate change targets. But this presents a big challenge.
“Like it or not, but a good chunk of developing countries still rely on coal-fired power supply that are not climate friendly,” said the DCM head. “People who are starving, have no clean water or flushing toilets are worried about day-to-day survival and can’t think 50-60 years from now about the survival of their great grandchildren.”
This means the climate change ambition for Asia need to be approached in a way that those in dirty industries are also offered help in transitioning to a better world.
“If a global conference like COP26 can address such issues and offer clarity, then it will allow the rest of Asia to approach climate change with more confidence,” the DCM head added.
There is hope. A DBS Bank-sponsored flagship research report of Climate Bonds Initiative in July this year identified companies across 45 countries worldwide that are climate-aligned but have not explicitly labelled about $913bn of their outstanding bonds green.
Asia Pacific tops unlabelled bonds that finance climate-related activities or projects with $436.6bn of bonds issued by 183 issuers, mostly from China, by 2020.
More broadly, banks have a key role in tackling climate transition and the evolution of the region’s ESG market. But the question is increasingly less about banks and investors being supportive, but more about the speed with which change can happen.
“The transition, and the financial ecosystem which supports and incentivises it needs to progress urgently, but also in a just way that does not recklessly hurt communities and economies across the region,” said Drew. “This is a tough goal, but it is absolutely achievable. Everything hinges on it.”
