Can Asia achieve its green finance aspirations?

Going green is a booming business. Globally, green bond issuance hit $100bn in the first six months of 2019, according to the Climate Bonds Initiative (CBI) – the fastest the sum has been reached in a single year.

In the Asia-Pacific region, China is leading the way, despite simultaneously being the world’s biggest emitter of greenhouse gases, with figures from the Global Carbon Project showing the country’s carbon emissions increased by 4.7% between 2017 and 2018. 

China has taken bold steps to push its environmental, social and governance (ESG) agenda. CBI data shows that China is at the forefront of green bond issuance in Asia-Pacific, totalling $86.2bn to June 2019 and dwarfing the $12.4bn of Japan and the $11.6bn of Australia. The Shanghai and Shenzhen stock exchanges will require ESG reporting from all listed companies by 2020. 

The country’s banks have also been upping their game. In June 2019, in a first for a Chinese bank, ICBC secured a $400m green term loan. 

But overall, Asia-Pacific has been found lacking. The World Wide Fund for Nature (WWF) 2019 Sustainable Banking Assessment reported that of the 35 banks analysed across the region, only four were meeting at least half of the outlined criteria for sustainability, though Singapore’s DBS, OCBC and United Overseas Bank (UOB) were praised for their moves to cease any future investments into coal-fired power plants or deforestation. 

Picking up the pace 

However, Asia is endeavouring to shed its image of being slow to engage with sustainable financing. Hong Kong raised more than $1bn when it issued its first green bond in May 2019, for example. Following the close of the oversubscribed bond, the Hong Kong Monetary Authority reported that investors were split into 50% from Asia, 27% from Europe and 23% from the US, illustrating the increasing appetite for green financing in Asia. 

Jonathan Drew, managing director in the sustainable finance, real assets and structured finance group at HSBC, says: “There is a perception that Asia is behind in adopting green financing, but in reality it already comprises more than one-third of the total green loan market. Of $23.8bn in green loans for the year 2019 to date, Asia has seen $8.3bn.” 

In some cases the slow pace of green bond issuance across parts of the region is simply down to an immature bond market: Cambodia only issued its first ever corporate bond in December 2018, for instance. 

Additionally, what was previously perceived as a lack of motivation to issue green bonds might have been down to the costs involved. Clifford Lee, head of fixed income at DBS, says: “In the past, the first question posed by issuers contemplating a green bond issuance was whether it will provide them access to cheaper funding costs. Of late, due to rising awareness of ESG concerns, issuers are increasingly looking to sustainability-themed bonds for reasons beyond short-term commercial considerations. They understand the importance of ESG factors and want to play a more active role in this space.” 

DBS has made ESG a key part of its business, taking a leading role in promoting sustainable financing in July 2017 when it issued the first green bond in south-east Asia. 

Financial sense

For green financing to take off, investments had to be seen to make financial sense. Investors are ultimately looking for yield, regardless of the associated environmental benefits. The pricing on green bonds may not be an incentive, but it is not deterring prospective investors. “The pricing of green bonds has still not demonstrated an advantage vis-à-vis regular bonds for issuers,” says Mr Lee. “The market is, however, moving in the right direction, as issuers with poor ESG records face increasing risk of poor investor reception for their capital market exercises.” 

Even with this groundswell of interest, Asia is still experiencing a substantial shortfall in the financing it needs to meet its green targets. Jeanne Stampe, head of sustainable finance in Asia at the WWF and founder of the Asia Sustainable Finance Initiative, says: “Asia has $5000bn of sustainable development investment needs between now and 2030, of which the Association of South-east Asian Nations [Asean] accounts for $3000bn. Governments cannot provide all of this finance alone and need private sector capital.” 

Worth the effort? 

What is stopping the market for creating the level of sustainable finance options it needs? A major stumbling block is the amount of work it takes, often without financial benefit. 

Matthew Kuchtyak, an ESG analyst of at Moody’s Investors Service, says: “Some issuers have cited incremental time and costs associated with issuing a green bond as a potential reason for why they have yet to enter the market. Issuing a green bond requires some additional processes, including tracking green bond proceeds and reporting on financed green projects and their environmental impacts, and not all issuers have the infrastructure in place to manage these processes.” 

There is a range of benchmarking tools to help define what is ‘green’, however. Mr Kuchtyak lists the Climate Bonds Standard, the People’s Bank of China green bond guidelines, the Asean Green Bond Standards, and the proposed EU Green Bond Standard and sustainable finance taxonomy. Eric Lim, head of group finance and chair of the ESG committee at UOB, also mentions the guidelines from the Loan Market Association, the Asia-Pacific Loan Association and the International Capital Market Association. Indeed, some claim the number of definitions could become overwhelming. 

“In general, there are too many standards of what constitutes ‘green’,” says Ms Stampe, who adds that some countries are deciding on their own parameters. “China has a comprehensive green guidance catalogue and the EU has come out with a green taxonomy,” she says. “The Network for Greening the Financial System will hopefully help to harmonise what constitutes green and, more importantly, what constitutes brown [carbon-based] investments through a robust taxonomy. We need less brown and more green to achieve net zero emissions by 2050.” 

Outlining HSBC’s approach, Mr Drew says: “China has established green catalogues through the National Development and Reform Commission and the People’s Bank of China. We will also look at the EU’s definition of green. We want to be able to standardise the product offering to meet the requirements across multiple jurisdictions.” HSBC has also provided support to China’s green finance committee. 

Bespoke portfolios 

Some organisations are cutting through the confusion by creating their own portfolios. The Asian Infrastructure Investment Bank (AIIB) announced in 2019 it was launching a $500m corporate bond portfolio with Aberdeen Standard Investment, with the aim of creating a debt capital market for emerging markets in Asia. The focus is on supporting infrastructure projects, including transportation, power and telecommunications, with ESG factors integrated into the investment process. 

Courtney Lowrance, principal environmental specialist at AIIB, says: “When we were developing the concept for the project, we contacted several ESG data providers, including MSCI and Sustainalytics, and found gaps in third-party ESG ratings coverage of corporates in many of our target markets. We found that analyst coverage in China was pretty good, with 500-plus corporates that had ESG ratings. But outside of China, data was much more limited. Markets such as India, Thailand, Malaysia and Indonesia each had only 50 to 100 corporates with ESG ratings.”

Through the partnership, AIIB is launching the Sustainable Capital Markets Initiative, a microsite that will become a resource for investors. AIIB will use it to engage with market participants such as corporates, investors and ratings agencies to develop a sustainable debt capital market. 

“We will use the portfolio as a proof of concept that investing with an ESG strategy can generate positive returns,” says Ms Lowrance. “Once we establish a track record with a portfolio, we will open the fund to other investors. Over time, we hope to create new benchmarks for infrastructure investment. This could be an ESG index for Asian emerging markets or an index on infrastructure-related issuers.” Since speaking to The Banker, the AIIB has announced that it is launching a second $500m climate bond portfolio, this time with European asset manager Amundi. The portfolio will begin investing in January 2020. 

Attracting the funds 

Environmental issues may have taken root in the public consciousness but attracting investors in this field is not easy, and having detailed information on any projects being funded is essential to satisfy investors’ keen awareness of reputational risk. “Investors increasingly want to know more about what they are investing in and if it adheres to best ESG practices,” says Mr Lee at DBS. “They are starting to ask questions about sustainability guidelines of issuers. They don’t want to be investing in companies with clear ESG violations.” 

Tackling the green financing shortfall could involve looking at other aspects of banking where funds could be used more effectively. HSBC’s Mr Drew says: “Green financing is much more than green bonds. We are embedding ESG considerations in our asset management, retail and private wealth management offerings so all customers could be offered sustainable options.” 

Tapping institutional investors has been tipped as a way to access a substantial flow of funds. Sean Kidney, CEO of the CBI, says: “We’d like to see much closer links between the big regional pension and superannuation funds, particularly the global scale ones with experience in infrastructure such as the Australian funds, on green finance and funding. We think this has to be part of developing the longer term project, investment and refinancing pipelines.” 

Pressure from various bodies will accelerate the adoption of green principles, he adds, saying that the influence of the Network for Greening the Financial System, local stock exchanges establishing green indexes and rules, and the support of governments and regulators, will all play a role.  

The projects the funds support will attract greater interest if they are in a sector that appeal to investors, according to UOB’s Mr Lim, who says: “Currently, green loans and bonds are more prevalent in the market, with rising demand from sectors such as renewable energy, real estate, and water and waste management services. There is also increasing interest in sustainability-linked loans from varied sectors such as agriculture and consumer goods as these funds can be used for more purposes.”

Sustainable from outset

As the market matures, the next step is widely predicted to be shifting the focus from projects that tackle existing issues to schemes that prevent them occurring in the first place. “There is a need to look beyond supporting renewable energy and green building programmes, which have received the bulk of green bond proceeds, to supporting other key sectors such as sustainable infrastructure and agriculture,” says Ms Stampe. “In particular, land use change accounts for 25% of greenhouse gas emissions, and sustainable land use must be part of the solution to the global climate crisis.” 

HSBC’s Mr Drew believes this solution is dependent upon the creation of portfolios. “The issuers create the supply of investments. Finding the right kinds of investments needs to be embedded into portfolio management,” he says. 

Institutions throughout the Asia-Pacific region are calling for green options to be prioritised; for example, Japan’s Government Pension Investment Fund has taken proactive steps. The world’s largest retirement scheme, with assets of $15,000bn, has recommended that its asset managers ensure ESG is a key consideration in their investment decisions. 

Ensuring this is a top-down directive from the C-suite would have a significant impact, according to Ms Stampe. “Bank boards need to be mobilised in order to ensure that sustainable banking is a core part of strategy and balance sheets are directed towards supporting resilient and sustainable companies and projects,” she says. 

However, placing the onus on banks to bring about the change would not expedite the process, Mr Drew believes. He says: “Banks need the assistance of the regulators to make green financing work; it is not possible for us to do it alone.” 

FROM GREEN TO BLUE

Green financing is being joined by blue financing, as bonds and funds are being created specifically to focus on projects to benefit the oceans – Fiji has already listed blue bonds on the London Stock Exchange, for example. 

Multilateral organisations are looking at developing this nascent sustainable bond market. The Asian Development Bank (ADB) launched the Action Plan for Healthy Oceans and Sustainable Blue Economies for Asia and the Pacific in May 2019, to increase financing and technical assistance for ocean and marine projects to $5bn from 2019 to 2024. The World Wide Fund for Nature will work with the ADB to apply its sustainable blue economy finance principles as a framework to the bank’s investment decisions.