Sustainable capital markets are becoming mainstream in Asia-Pacific, with the market witnessing robust growth in volumes, products and issuer types in 2021.
Sustainable capital markets in Asia-Pacific rebounded strongly in 2021 after a relatively flat 2020 amid the coronavirus pandemic. In the first half of 2021, total issuance of cross-border bonds with an ESG label — i.e. green, social, sustainability or sustainability-linked bonds — was over USD 50 billion. Compare that to the issuance volume in all of 2020, which was approximately USD 33 billion1.
According to Atul Jhavar, Asia-Pacific Head of Sustainable Capital Markets at Barclays, this trend reflects the growing importance of ESG investing in Asia-Pacific. In this 3 Point Perspective, he lays out some of the forces shaping the market.
Net zero pledges
Governments across Asia-Pacific have rolled out green measures over the past 12 months, including environmental commitments and stimulus programmes, which will drive further ESG debt issuance from the region.
President Xi Jinping’s announcement that China will reach carbon neutrality by 20602 was a significant development. Similarly, Prime Minister Yoshihide Suga declared that Japan will reduce greenhouse gas emissions to net zero by 20503, including specific plans to promote research and development in solar technology, carbon capture and recycling, as well as revising the country’s policy on coal-fired power plants.
Even smaller markets - which face land and natural resources constraints with respect to renewable energy - are taking bold steps. For example, the Singapore Green Plan 20304 is a whole-of-nation movement to advance the agenda for sustainability.
These government commitments will ultimately direct many sectors across the economy towards achieving net zero goals. Doing so will require multiple sources of financing and should be a major contributing factor to the growth of the ESG bond market in the region.
Issuance beyond the energy sector
Addressing the energy mix in industry, buildings and transportation is the major component of going green, but other activities such as agriculture and cement or aluminium manufacturing also have very material carbon footprints.
These carbon footprints can be reduced, but will often depend on technological innovation and breakthroughs, which will require significant capital investment.
The sustainable finance market can be used to channel capital towards improved environmental outcomes. The market was initially focused on green bonds and other ‘use-of-proceeds’ bonds, which required the funds to be used for specific green or social projects.
More recently, a new type of product has captured the market’s interest: sustainability-linked bonds (SLBs). These bonds give borrowers the flexibility to use the proceeds in their normal course of business, but have embedded financial incentives linked to environmental performance indicators or targets. An SLB can therefore encourage a company to reduce its overall carbon footprint over time.
In Asia-Pacific, the nascent SLB market has seen issuance this year from the real estate, manufacturing and financial sectors, and we expect this product to witness strong growth in line with global trends. Over time, we may even see SLBs overshadow the overall green bond market in the region.
Heightened investor scrutiny and standardisation
While most sustainable finance standards are voluntary and fairly basic, the market has come a long way in terms of standardisation. In most parts of the cross-border bond market, issuers now follow the International Capital Market Association (ICMA) principles for ESG bonds.
Domestic bond markets in the region have also seen positive developments over the past year. In China, for example, a lot of work has been done to harmonise its domestic taxonomy with global standards, which will encourage participation from global investors as they face more stringent ESG investing and disclosure requirements.
As new products like SLBs come into play, there will be a period of time spent testing various structures and seeking issuer and investor reactions. Opinions currently differ on the levels of financial incentives, penalties and targets, as well as what sort of disclosure and third-party verification is required. Over the next 12 months, more standardisation in the SLB market is expected, which will support growth.
The percentage of ESG bonds in the Asia-Pacific bond market has steadily grown in the past few years, accounting for more than 17% of total cross-border issuance in H1 2021. Ultimately, ESG bonds will become mainstream in the region and be fully integrated into the business of borrowing and investing. For a majority of the market, they will not be viewed as a specialised product, but instead will be leveraged as a way of channelling all sectors of the economy towards long-term sustainability goals.
Atul Jhavar is a Director within the Investment Bank. Based in Singapore, he leads Barclays’ Sustainable Capital Markets business in Asia-Pacific and also oversees the firm’s DCM business in Southeast Asia.
Atul has over 15 years of experience in the Asian fixed income markets. He has spent most of his career based in Singapore and Hong Kong and has executed numerous transactions for sovereigns, banks and corporates in the region, including green bonds, green project finance and sustainability-linked debt.
Atul has a degree in Computer Engineering from Nanyang Technological University.