Although south-east Asia has arguably been slow off the mark in the adoption of green bonds, things are starting to change. 

South-east Asia needs an estimated $200bn annually between 2016 to 2030 to support climate-compatible infrastructure, renewable energy, energy efficiency, food security, agriculture and land use, according to the 2017 ‘Green Finance Opportunities in Asean’ report by DBS Bank and the UN Environment Programme.

Much of that would need to be provided by green finance. But judging by the past performance of the 10-member Association of Southeast Asian Nations (Asean), the region is lagging in servicing its green needs. In 2020, Asean’s collective issuance of green, social and sustainable bonds or loans, reached $12.2bn — a paltry sum when compared with the global tally of $700bn, according to Climate Bonds Initiative data. 

SGX was one of the first exchanges to make sustainability reporting mandatory for listed companies five years ago

Herry Cho, SGX

The slow start of Asean’s green finance can be explained by multiple factors. First, the region has been slow to develop its normal bond markets. Second, it has been beset by other challenges, such as the 2007/9 global recession, trade tensions between the US and China, political instability at home and, most recently, the Covid-19 pandemic. Finally, the cost of green finance led to a reluctance to use it. 

However, green finance is heading for a take-off in the post-Covid era, bankers say. “I would say the Covid-19 pandemic turned the spotlight on green, social and sustainability bonds, and highlighted the need to look beyond the financial bottom line,” says Clifford Lee, DBS’s global head of fixed income.

The bank has taken the regional lead in arranging green bond issuances. “Now you have to look at the triple-bottom lines — climate, social and the financial bottom lines. It has evolved from something that was ‘nice to do’, to a ‘must do’,” Mr Lee says. 

Changing landscape

There are other considerations at work besides Covid. The EU, which is at the forefront of the global push towards issuance of environmental, social and governance (ESG) bonds, has hinted at upping import tariffs on countries that continue to use fossil fuels. The US, under the leadership of president Joe Biden, is once again taking climate change seriously. The latest UN climate change assessment in August warns that the situation is a “Code Red for humanity”, with the world pushing “perilously close” to the internationally agreed threshold of 1.5 degrees Celsius above pre-industrial levels of global warming. 

Many of the worst carbon-emission offenders are found in Asia, where coal remains a prominent power source and most economies are still highly dependent on other fossil fuels, such as liquified natural gas. According to the think tank Carbon Tracker, China, India, Vietnam, Indonesia and Japan are responsible for 80% of the world’s planned coal plants and 75% of its existing capacity. The Philippines and Thailand still have coal-powered plants, albeit as a diminished share of their power grid.

Asean governments will need to step up to the plate at the UN’s upcoming COP26 meeting (31 October to 12 November in Glasgow, UK) to announce their accelerated plans to reduce carbon emissions from their power grids and transport sectors, or potentially face higher tariffs on their imports and reduced foreign direct investment into their economies.

Herry Cho

Herry Cho, SGX

“This is a watershed COP, I feel,” says Anouj Mehta, unit head of green and innovative finance at the Asian Development Bank. “With all the red alerts issued by the UN and other agencies, I feel there will be some interesting initiatives being announced at COP26, followed by an upsurge of green and climate activities.” 

The climate challenge has sunk in at the government level. “I think pressure from the EU, the change in direction in the US administration, and the UN initiative on climate change — all of that is going to be integrated into the Thai government’s plan to revive the economy going forward,” says Thaweelap Rittapirom, executive vice-president at Bangkok Bank. 

But on the corporate level, the shift towards green finance is likely to be driven by investors, as it was in the EU. “I would say the green bond market is very investor-driven,” says Nneka Chike-Obi, director of ESG research for sustainable finance in Asia-Pacific at Fitch Ratings Hong Kong.

“Companies didn’t just wake up and decide they wanted to allocate bond proceeds to green activities. The growth in the market is due to strong demand from institutional investors for green assets in their portfolios,” she adds. 

Playing a facilitator role 

Banks play a key role as arrangers of ESG bonds and as marketers of those instruments to investors. Green bonds and finance promise to be a growing fee-based activity for a few Asean banks, especially those with strong corporate lending portfolios that they want to keep happy. “Bangkok Bank has been working with a lot of large companies that have invested overseas and have a lot of activities abroad,” Mr Thaweelap says. “So for us, it is important that we understand and get into this green space so that we can assist our customers, and pick up the trend and move forward.”

Bangkok Bank has taken a lead in Thailand’s green finance, arranging about 70% of all government and non-government bonds issued since 2019, when the first green bond was launched by the BTS Group, operator of Bangkok’s electrified Skytrain mass transit system, which raised THB20bn ($607.2m). Bangkok Bank, Bank of Ayudhya and Standard Chartered were the joint lead managers of the issuance of the Thai Finance Ministry’s sustainability bond in August 2020, raising THB112bn to help finance an extension of Bangkok’s mass transit system. The 15-year bond, the first such sovereign issuance in south-east Asia, was listed on the Luxembourg Exchange. Foreign institutional investors bought up 20% of the issuance, compared with the normal 10% for Thai sovereign bonds.

One can expect many more such sustainability bonds in the mass transit space in south-east Asia, which has seen a spurt in urban mass transit projects in recent years. “Mass transportation is considered to be green, because it is considered to have low emissions and has the potential to replace vehicle transportation,” says Ms Chike-Obi. “Malaysia, Indonesia and Hong Kong all did sustainability bond issuances this year. Vietnam and the Philippines say they are working on sovereign sustainability bond programmes, and Singapore is also looking to issue its first sovereign sustainability bond,” she adds.

Stock markets set the green roots

The Singapore Exchange (SGX) has clearly taken the regional lead in creating the ecosystem for credible, sustainable finance in south-east Asia. “It’s been about 10-plus years since SGX first started its sustainability journey,” says Herry Cho, SGX’s head of sustainability and sustainable finance unit, which was set up in 2021 to drive the exchange’s various sustainability activities.

“SGX was one of the first exchanges to make sustainability reporting mandatory for listed companies five years ago, and to take the leadership in supporting what is very material today — climate-related financial disclosures,” explains Ms Cho. The SGX now accounts for about 50% of international green, social and sustainability (GSS) listings in Asia-Pacific, with more than 170 active GSS bonds currently listed.

In its latest move, it has announced plans to make the Task Force on Climate-Related Financial Disclosure (TCFD) reporting standards mandatory for SGX-listed companies. “The proposed standard to be mandatory is TCFD, because there is so much focus on climate change-related disclosure being a very material point,” says Ms Cho. SGX is the first exchange in Asean to use TCFD reporting standards, which will help towards alleviating ‘green-washing’ concerns. “For use of proceeds-based GSS bonds, part of the credible storyline goes back to the fact that the use of proceeds should link back to the overall strategic [sustainability] direction of the issuer,” she adds.

Other Asean exchanges are trying to catch up. Thailand’s Securities Exchange Commission (SEC) will introduce mandatory ESG disclosure requirements in 2022. “Given the SEC’s requirement on mandatory ESG disclosures, all listed companies are required to report their ESG information as part of the annual public filing, enabling investors to assess sustainability reporting,” says Pakorn Peetathawatchai, president of the Stock Exchange of Thailand (SET). SET has been offering capacity-building programmes to help listed firms comply with the regulation.

Banks seek new green instruments 

DBS has been at the forefront of the regional push out of Singapore. “We are the only Asian bank that is active in the region’s G3 currencies space, enabling us to play an active role in Asia’s ESG issuances,” says Mr Lee. “In particular, we are active in Singapore, China, Indonesia, India and the Philippines — in local currencies in the ESG space. We are the only Asian-headquartered bank that is doing that.”  

While DBS has had success in China, which accounts for about 70% of the ESG bonds issued in Asia, it has been more of a struggle in south-east Asia, where large Asean corporations have been reluctant to pay the extra costs involved in going green, and perhaps have felt less pressured to do so given the low interest rates they can already enjoy from the local banks and with normal bond issuances. 

I would say the Covid-19 pandemic highlighted the need to look beyond the financial bottom line

Clifford Lee, DBS

Fortunately, as the global ESG market has evolved, so have the products. DBS has been prioritising ‘sustainability-linked’ bonds and loans, which are to be distinguished from ‘use of proceeds’ bonds (lending that is limited to projects that are demonstratively linked to sustainability-related activities). Sustainability-linked bonds, by contrast, set certain commitments for the company to achieve, such as reducing its carbon emissions in a given time frame, and hike or lower the interest rates in accordance with their performance. 

Sustainability-linked bonds, a relatively new instrument, have proven popular among Asean clients, helping them to transition to greener options. “In Asia, we have to transit from where we are to where Europe is — but we have to first transit from where we are to where Europe was five to 10 years ago, because if we move too quickly the market will be discouraged and it won’t grow much,” says Mr Lee. DBS arranged south-east Asia’s first such bond for the Singapore-based infrastructure consultancy group Surbana Jurong Group, amounting to $250m. If the company fails to meet its green commitment, the interest rate will increase by 0.75%. The bond was oversubscribed by six times. 

Clifford Lee1

Clifford Lee, DBS

Thai Union Group (TUG), one of the world’s leading fish-processing companies, secured both a sustainability-linked syndicated loan and a bond in May 2021, raising a combined THB17bn. The money was needed to refinance around $700m in bonds and loans coming due this year. With Thailand constantly under fire for its poor record in fisheries’ sustainability and labour abuses, TUG has invested heavily in cleaning up its activities over the years, putting in place its SeaChange programme that includes electronic monitoring of fishing vessels and a host of other sustainable practices.

TUG opted for a sustainability-linked loan and bond shortly after the SEC announced regulations allowing the new instrument. “With the sustainability linked to the commitment, it is much easier for us to track,” says Ludovic Garnier, TUG’s chief financial officer. “We don’t have to prove that the proceeds coming from the loans are used for sustainability.” The interest payments on both loan and bond were below normal bond rates, and they will come down further if the loan’s commitments are met. Both instruments were heavily oversubscribed. “We had these green targets already, but the sustainability-linked loans play the role of an accelerator,” he says.

Thailand’s Bank of Ayudhya, along with its main shareholder Japan’s MUFG, were the lead banks behind sustainability loans and bonds for TUG. The Japanese connection was important for selling the issuance. “It was our strategic objective to say we would raise some of the money outside of Thailand, and Japan for us was an obvious [choice] because it is already a large market for our business,” Mr Garnier says.

TUG, a multinational with offices and subsidies worldwide, had the sustainable credentials and financial savvy to pull these two sustainability-linked loans off, but it remains to be seen how many other Thai corporations can follow suit. “I think that in the future, the companies that don’t have this kind of financing will be penalised, either because they won’t have access to liquidity or to the attractive interest rates,” says Mr Garnier.

And banks will play an increasingly important role in determining what is bankable in the greener business climate. “Going forward it is going to be: if you are not ‘green’, I just cannot buy it, and access to capital will be increasingly cut off,” suggests Mr Lee.


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