Future looks good for transitioning to a low carbon economy
Green bonds are a good way to get into sustainable investment especially in Asia, which issued 30 percent of global issuance in 2019
ASIA is playing an increasingly important role in providing capital to fund the transition to a green and sustainable future, as seen last year with 30 percent of global green bond issuance coming out of the region. This number is on track to continue to grow higher in the future.
Meanwhile, corporates across different sectors are seeking to better integrate sustainability within their operations and reduce environmental, social and governance (ESG) risk factors against a backdrop of credit ratings agencies formally integrating ESG risks into their process which will ultimately affect the price of debt issuance for borrowers.
The market is moving to see how capital can be invested and distributed into those companies that may not be able to access that pure green or even light green space. Manufacturing and the industrial sectors, shipping, air travel – these are all high greenhouse gas emitting sectors that need support to transition to the low carbon economy.
David Jenkins, head of sustainable finance, corporate & institutional banking, National Australia Bank, explains during a panel discussion at the 14th Asia Bond Market Summit organized by The Asset in association with the Asian Development Bank: “Over the last 12 months the discussion has evolved dramatically from what’s green and what’s sustainable to now how do we support companies that are looking to transition that wouldn’t typically be thought of as issuers of green bonds or sustainability bonds.”
Opportunities and risks
“There is capital to be invested, so the means to change the way we do things are there. And green bonds are a very useful instrument to do that,” says Cedric Rimaud, Asean programme manager, Climate Bonds Initiative. “A green bond is just a bond – except the issuer will just tell the investor what the capital will be used for.”
The size of the global bond market is US$100 trillion. The green bond market is predicted to reach 1% of that amount by 2020, and it is growing rapidly - it is currently the size of the convertible bond market, which took more than 30-40 years to grow, yet it was achieved in 4-5 years, Rimaud explains. “So, by using a vehicle that investors are familiar with we can access capital to help this transformation.”
The risk is just like any other bond, Rimaud continues. “It starts with the credit risk of the issuer, that is what investors care about first. So, obviously arrangers must bring to market issuers that are of good credit quality, and if not, price that accordingly so that investors understand that they are getting a higher return because there is higher risk.”
Disclosure and transparency
When a market is new, there are always possible issues with misinterpretation and maintaining the integrity of the green market that has been developed. Labels are now an aspect of this, but even more important is transparency and disclosure. There is clearly an appetite for transition, and this is also in line with what is happening globally.
Global regulators are pushing now for more transparency and more disclosure. “There is a huge increase in demand for issuers and borrowers to start to disclose those ESG ratings more proactively,” says Nicholas Gandolfo, associate director, sustainable finance solutions – Asia-Pacific, Sustainalytics. “There are a lot of stock markets demanding more, regulators are demanding more, the banks demand more of borrowers so I think the whole ecosystem is growing, and that is in a positive way and will give people more confidence and help them grow the market.”
That is part of the reason the Green Bond Principals group is putting a working group together to try and create some guidelines, or think about the guidelines necessary for transition financing, and if so, what form of metrics makes sense, Gandolfo explains. “It will be an iterative process. It is not dissimilar to the market for green bonds, say five to 10 years ago, where people looked very much at what had evolved through the likes of the World Bank and the EIB where they were reporting greenhouse gas emissions and it’s now moving into the social bond world. Transition finance is the ‘next cab off the rank’ so to speak.”
“In Asia we have the financial markets that are heavily reliant on bank lending, and to some extent, to finance all this infrastructure that needs to be built there will be some capacity constraints from the banks, so we need to find a way to find this capital that we need to finance this infrastructure,” Rimaud points out. “Using securities that can be traded, like green bonds, is actually a way for banks to participate more in that trend of channelling capital to those issuers.”
“The whole securitization market is a huge growth opportunity,” Jenkins says. Indeed, some of the metrics that were forecast a year or so ago were with the likes of Fanny Mae in the US who is now the biggest green bond issuer globally - they came from nowhere and started labelling their bonds. “They can track and report on the impact of that financing as we start to see more residential mortgages, rooftop solar, securitized asset classes that deliver positive environmental outcomes.”
“One of the quickest growing parts of the sustainable finance family at the moment is the sustainability linked loans, so, hopefully they will continue to grow and show that using an instrument as an engagement piece can be done, can generate impact, can generate change, and hopefully that starts to transfer to other parts of the bond market,” Gandolfo says.
When we hear about who is buying the green bonds that are issued out of Asia, there is actually a very high proportion of Asian investors. They may not publicly disclose it, but they are putting their money to work in that space. “We also see the non-Asian entities, for example the European asset managers, or European insurance companies that have operations here in Asia that obviously have to comply with their global mandates, so that is also accounted as Asian capital and that is participating in a trend where more and more investors will follow ESG principals. The EU taxonomy in that respect will have a big impact in forcing investors to do so,” Rimaud says.
The growing call for more transparency, more disclosure and more impact will only continue to gather pace as these will become the norm, not the exception. And when thinking about financing at the outset and how one is looking to the future, financing with positive environmental social outcomes attached to it is a great way to accelerate the transition to a more sustainable and low carbon economy.