Issuers in Asia are making a beeline for funding based on environmental, social and governance (ESG)-related objectives, and are being drawn to the reputational and long-term cost efficiencies to result from adopting a sustainable business strategy.
“There is not a major corporate across the region which isn’t examining what they are doing, how they are transitioning and what investments they need to make [to facilitate that transition],”said Jonathan Drew, managing director, ESG solutions, global banking at HSBC.
He explained that to do so, companies are assessing risk, considering how to enter new sectors and ultimately shaping longer-term plans to achieve lower emissions.
The demand for green securities is showing no sign of abating, with measurement methodologies and standards around such instruments being developed in line with demand. The trend is evident in the emergence of a green premium, or ‘greenium’, which investors have begun to offer.
“We are observing greeniums of 10 to 25 basis points in the high yield green bond market,” said Kamran Khan, Deutsche Bank’s head of ESG for Asia Pacific.
Companies printing sustainability linked notes have demonstrated the ability to shave their cost of capital in the primary market, because demand for green debt has outstripped supply. Not only will ESG borrowers diversify their source of funds, they will also be able to cultivate more long-only creditors, as asset managers opt to buy-and-hold such investments.
Chaoni Huang, head of sustainable capital markets for global markets at BNP Paribas in Asia Pacific told FA that sustainable bonds have more stable secondary market potential compared to conventional debt, “ESG investors are very ‘sticky’; they tend to hold onto these bonds.”
She added that in the context of market volatility, this is actually helpful for issuers in the secondary space - as it ultimately leads to future issuance.
The gradual removal of regulatory uncertainty will boost growth of green capital market instruments in Asia, explained Khan, citing the example of India unveiling its Paris and renewable targets last December. This will enable a robust pipeline of Indian issuers debuting with renewable energy related financings through 2021. The outlook for green finance in Asia is incredibly strong in both the near and long term, he said.
In the mid-term, as the ESG bond market matures, refinancing activity will rise, said Michael Ng a partner at law firm Linklaters, further fueling ESG activity.
Green, social and sustainable (GSS) bond issuances in Asia in 2021 touched $100 billion as of mid-June, already surpassing the total for last year, according to data from Dealogic. In the same period globally, GSS bonds worth $480 billion have been sold, compared with $572 billion in the whole of last year.
This is an excerpt from an article in the Summer 2021 issue of FinanceAsia