As Asian countries subscribe to the Paris climate agreement goals, green bonds are providing the finance for climate-related and environmental projects in the region. The supply of Asian US dollar-denominated green bonds rose from just USD 2 Billion in 2015 to USD 17.5 Billion in 2019, and while issuance was hit by COVID-19, it is expected to return to pre-pandemic levels in 2021.
The Asian dollar-denominated green-bond market is now worth USD 50 Billion. That is about half the size of the Asia local-currency green-bond market, but it has been catching up with the global market quickly and now accounts for 24 per cent of the global dollar-denominated green-bond universe, up from 8 per cent five years ago.
China is Asia’s largest issuer and the second-largest globally with USD 22 Billion of dollar bonds outstanding – dominated by banks and property developers – plus USD 96 Billion in renminbi-denominated green bonds. India is next-largest.
The market’s strong growth reflects a rising awareness of environmental, social and governance issues plus increasing demand for ESG and sustainable investment products.
The green financing channel allows issuers to tap into longer-term funding and a larger investor base, permitting issuers to brand themselves as socially and environmentally responsible, despite higher set-up costs for green bonds and additional annual auditing and reporting.
Demand has exceeded supply, with order-books for new issues in 2020, on average, 5.7-times bigger than the bonds available. Asian investors and fund managers are the main buyers.
Yet despite this strong demand, Asian green bonds are priced broadly in line with the region’s non-green bonds, without yield premium seen in developed markets. This may reflect different bond currencies and investor bases plus Europe’s larger pool of ESG and green-bond investors and investments.
And being green does not make bonds safer: 2020 saw the first green-bond default. About three-quarters of Asian dollar green bonds are investment grade – primarily bank, sovereign and quasi-sovereign bonds.
Some USD 10.8 Billion of dollar-denominated green bonds were sold between January and October but we forecast gross issuance of USD 17 Billion to USD 20 Billion in 2021, backed by growing green projects and USD 8 Billion to USD 10 Billion of refinancing, thanks to strong investor demand and favourable government policies.
Pledges by Asian countries to meet Paris Agreement goals include China’s aim for carbon emissions to peak before 2030 with carbon neutrality before 2060; India’s plan to reduce the emission intensity of GDP to below 2005 levels by 2030; Indonesia adopting new and renewable energy for at least 23 per cent of primary energy in 2025; and the Philippines banning new coal-fired power plants. Meanwhile Singapore has introduced a carbon tax, and South Korea hopes to become carbon neutral by 2050.
We believe such policies mean governments will incentivise companies to undertake green projects and encourage broader and easier green financing channels, including green bonds.
Asia’s dollar-based green-bond financing has focused on renewable-energy, energy efficiency and clean-transportation projects to reduce carbon emissions. We now also expect to see more resources allocated to pollution prevention and natural resources management, allowing a greater diversity of issuers to join the green financing market.
First published 5 November 2020.
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