Transition financing heats up in Asia - Part 3

Alongside green financing and ESG, a new class of bonds called ‘transition bonds’ has come to prominence. This type of financing funds firms’ transition towards a more sustainable business.

ESG goal-based financing has become a fixture in the region but it will be transition funding that will play a crucial role in determining Asian countries’ progress towards reaching net zero emissions by 2050 (or 2060 in the case of China).

“If you look at the energy mix in Asia, many countries rely on thermal coal as the primary source of energy because it’s cheaper and they have the historical infrastructure for it in place,” said Chaoni Huang, head of sustainable capital markets for global markets at BNP Paribas in Asia Pacific.

To transition, the market needs to finance the shift of brown industries such as shipping and aviation – traditionally high carbon emitters – to green.

Methods such as the use of abatement technology and carbon capture and storage (CCS) should be deployed, added Paul Davies, a partner who co-chairs the ESG Taskforce at law firm Latham & Watkins. “You need to think more holistically in terms of how we get to net zero; it’s through transition.”

When green bonds and loans first started to gain traction, there was a view that companies producing hydrocarbons could not participate. But market constituents soon realised the importance of those companies investing to substantially reduce their emissions, even if production continued for a time,

Jonathan Drew, managing director, ESG solutions, global banking at HSBC, observed. “[Companies transitioning] need capital to support their path to lower emissions and there is appetite to finance those transition journeys,” he said.

There are recent instances where senior financiers within the Chinese establishment have gone on record to say that over time, the change in composition of debt financing for the country should be gradual, underscoring the importance of transition funding.

A gradual move will help China navigate potential shocks in the financial system as it reroutes financing away from some of the more pollutive industries, according to Timothy Hia, a partner at Latham & Watkins and chair of its finance department in Asia.

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

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