Transition financing heats up in Asia - Part 2

While the appeal of green and sustainable debt is undeniable, the key question for first-time issuers is where to start.

Green finance, a precursor to sustainability linked offerings, is binary on the matter of use of proceeds. The cash must go towards specific activities that fall under predefined categories - for example, renewables.

Sustainable finance, meanwhile, is rooted in the idea of fostering an organisational culture that aims to make operations and outcomes more sustainable in the long term, incorporating sustainability at a strategic level.

Chief financial officers (CFOs) endeavouring to integrate ESG into their debt mix should take care to make their ESG goals consistent with existing corporate social responsibility strategies, said a representative at the Bank of China (Hong Kong).

Management executives must also acquaint themselves with the language and tenor of the frameworks that aim to regulate sustainable financing in the region.

Issuers across a range of jurisdictions in Asia, including Hong Kong, Singapore and India refer to the green bond, social bond and sustainability linked principles published by the International Capital Market Association (ICMA) when planning to fundraise.

“Our usual recommendation to CFOs who are about to start writing their ESG financing framework is to start with those principles,” said Karen Cheng, counsel at law firm Linklaters.

There is a trend towards greater convergence among nations in terms of international standards for what constitutes an ESG instrument, added Cheng.

Meanwhile, on a national level, the People’s Bank of China, the National Development and Reform Commission and the China Securities Regulatory Commission jointly released the Green Bond Endorsed Projects Catalogue (2021 Edition), which will come into effect from July.

The next step would be the evolution of bloc-wide rules to govern ESG financing.

The introduction of the EU taxonomy on sustainable finance by the European Commission in April 2021 is widely regarded as the biggest recent step towards standardising this form of fundraising.

While these changes do not directly apply to Asian participants, EU-based funds, which form a steady source of demand for Asian green and ESG debt, must comply.

Last September, for instance, Bank of China (BoC) issued the first blue bonds in Asia. The $942.5 million equivalent notes consisted of a dollar tranche and a CNH (offshore yuan) portion. It unearthed a new investor base for BoC, with an EU fund and supranationals – not normally seen in Asian bond offerings – coming on board, said Ng at Linklaters, which advised on the offering.

The bond was split between a $500 million three-year tranche and a CNH3 billion two-year portion. The inaugural deal marked Asia’s first-ever blue bond, a first for the private sector and a first from a commercial bank in the region, said Chaoni Huang, head of sustainable capital markets for global markets at BNP Paribas in Asia Pacific. The French lender was global coordinator for the issuance.

Huang explained that when placing sustainable bonds for APAC issuers, it is APAC-based investors who take the larger share. However, “European investors place ESG considerations more highly than their APAC counterparts in the sense that they really look for ESG label instruments to add to their portfolio”, she added.

There is a risk of bifurcation occurring between EU and Asian markets if standards relevant for one market are imposed when assessing investment appropriate for another, said Jonathan Drew, managing director, ESG solutions, global banking at HSBC. This dichotomy needs to be reconciled to keep capital flowing effectively and efficiently to support genuine investments into economies transitioning to a low carbon footprint.

“You’re going to see more focus on how people package financial products. That’s one of the examples where having robust regulatory frameworks provides greater assurance around what actually is being sold,” said Paul Davies, a partner who co-chairs the ESG Taskforce at law firm Latham & Watkins.

These product innovations will lean towards nuance as opposed to borrowing that is labelled ‘green’ or ‘not green’.

This is an excerpt from an article in the Summer 2021 issue of FinanceAsia

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