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Interest in green bonds is increasing in Asia, but investors are asking more questions about how their money will be invested.

Asia’s appetite for green bonds is growing. In the Emerging Market Green Bonds Report, published in April 2021, the International Finance Corporation outlined how the east Asia and Pacific region has accounted for 76% of cumulative emerging market bond issuance since 2012. Between 2012 and 2020, seven countries in the region issued bonds, comprising 262 issuers and a volume of $172bn. 

During 2020, China remained the biggest issuer of green bonds. However, its issuance of green bonds declined from more than $30bn in recent years to $18bn. 

Mervyn Tang, senior director and global head of environmental, social and governance (ESG) research, sustainable finance, at Fitch Ratings, says: “Asia slowed down its green bond issuance in 2020 slightly, but growth in overall ESG bond issuance increased substantially, with China especially issuing a lot of Covid-19 bonds, which are often classified under social bonds. Still, Asia represented around a sixth of global green bond issuance in 2020 and has begun to pick up again in the first quarter of 2021.” 

Investor interest 

Among the resurgence in bonds launched in the first months of in 2021 is the first sustainability bond to be issued in Singapore. United Overseas Bank (UOB) launched the bond in April 2021, and the proceeds will be channelled into the green- and social-bond projects outlined in the bank’s sustainable bond framework. 

The question is how to avoid greenwashing in this environment

Mervyn Tang

Items under the eligible green categories range from renewable energy and green buildings to circular economy products and sustainable management of land. For the social categories, investments in access to essential services, affordable housing and employment generation make the cut. 

Koh Chin Chin, head of central treasury unit at UOB, says the bank wanted to take a holistic approach, rather than focusing on the environmental angle. “While investors have been paying a lot of attention to climate change risks, we have also seen increasing market interest in Covid-19-related themes within the social bond sector,” she says. “Therefore, our proceeds will also be used for Covid-19-related temporary bridging loans to small businesses in Singapore, to help them sustain employment and tide over the challenges from the pandemic.” 

At the issuance of the dual-tranche bond, Fitch rated the $750m senior unsecured notes due in April 2026 as AA–, and the $750m subordinated notes due in October 2031 as A. Ms Koh says the structure of the bond has helped it to reach maximum investor coverage. It has a 144A format, which follows the rules of the US Securities and Exchange Commission. This means securities can be traded among institutional buyers, with a shorter holding period of between six months and a year, rather than the standard two years. The bond saw a strong response from international investors, and 60% of the final orderbook was sustainability-focused investors. 

Greenwashing risk 

While Asia is in a strong position with green bond issuance, the region is facing conflict around its reliance on fossil fuels, particularly coal. Mr Tang explains how natural gas has formed part of China’s low-carbon transition strategy to move away from coal. While renewable capacity is set to increase in China, it will not be enough to replace the role of gas.

Additionally, countries across the region are defining their own taxonomies, which is causing differences to arise in what is considered a sustainable investment. 

Mervyn Tang headshot

Mervyn Tang, Fitch Ratings

“The question is how to avoid greenwashing in this environment,” Mr Tang says. “There is a recognition that the rules coming out of Europe, for example, may not exactly fit Asia’s needs. However there is plenty of international co-operation to find common ground, and there are more commonalities than there are differences.” 

There have been steps from China to bring all of its rules on onshore and offshore issuance in line. 

“Initially, ‘green coal’ or ‘clean coal’ was eligible, but regulators have tightened these guidelines,” Mr Tang says. “Some differences remain: for example, under the People’s Bank of China’s (PBOC’s) guidelines, only 50% of proceeds have to be allocated to eligible green projects, with the rest able to be used for general working capital, whereas some commonly used global standards, such as the Climate Bonds Initiative [Scientific Framework], require 95%.” 

The PBOC announced in April 2020 that it would be allocating more green bonds to its foreign-exchange reserves and limit the level of investments into high-carbon assets. China is aiming to reach carbon neutrality by 2060. 

As the expectations of regulators rise, so do those of investors. “We are seeing investment fund managers being increasingly asked by their clients for statistics on what percentage of their portfolio is in green bonds, and what are the specific uses of the proceeds,” Mr Tang says.

However, for other investors, the drive for green bonds comes secondary to their search for yields.

“There is some desire to hold green bonds over conventional bonds, but only if the return is similar,” Mr Tang adds. “We have seen Europe move towards a willingness to pay a bit more for green bonds, and we anticipate this will happen in Asia.” 

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