‘Net zero’ carbon targets for China, South Korea and Japan set to spur issuance.
TOKYO/ HONG KONG — Asian “green bond” issuance is surging as countries in the region roll out stiffer targets to curb climate change — and investors are keen for more.
Some of the region’s most important financial centers, including China and Hong Kong, are spurring the trend with new guidelines on green investing for money managers.
And perhaps because regional green bonds have not commanded the same kind of price premium, or “greenium,” as in other parts of the world, they are helping to widen the pool of investors. Green bonds are tools used to fund projects with environmental or climate benefits in areas such as energy, transport, waste management, building construction, and water and land use. Interest in funding projects this way is set to accelerate because of the growing focus on decarbonization in Asia, where a string of governments have stiffened their “net zero” emissions targets and where pollution is a huge concern.
Of the world’s cities with the worst air pollution last year, ranked by Swiss air quality technology company IQAir, the top 148 are all in the Asia-Pacific region.
The region requires annual investment of $1.5 trillion to achieve the U.N.’s sustainable development goals by 2030, with clean energy and climate action alone accounting for almost a third of the funding, the United Nations Economic and Social Commission for Asia and the Pacific estimates.
“The key evolution in the last couple of years has been the greater involvement of governments in this arena, most importantly as implementers of policies to support issuance [of green bonds],” said Patrice Conxicoeur, head of Southeast Asia at HSBC Asset Management (Singapore).
This means the “Asian Green bond market should continue to broaden, and that issuer diversification will increase, with higher private-sector participation,” he said.
Global green bond issuance reached a record $269.5 billion last year, according to the Climate Bonds Initiative, an international nonprofit organization. While Western countries — the U.S., Germany and France — were the top three issuers, fourth-ranked China and the rest of Asia are fast catching up.
In the first three months of 2021 Asia Pacific issuers accounted to 24% of global issuance, up from 18% for all of 2020, according to a Moody’s report.
Volumes from China have soared threefold to $26.1 billion this year, making it the largest issuer in the world with a market share of 13.4%, according to data from Refinitiv.
The world’s second largest-economy has set a goal to reach a carbon emissions peak by 2030 and carbon neutrality — that is, a position where no net carbon emissions are being produced — by 2060. China was the biggest carbon emitter in Asia (and the world) last year.
To achieve carbon neutrality by 2060, China needs to invest 2.2 trillion yuan a year ($340 billion) this decade, with the number likely to grow to 3.9 trillion yuan annually in the period from 2031 to 2060, Societe Generale economists led by Michelle Lam in Hong Kong said June 24. Assuming that 30% of the green investment is financed by bonds implies a 7 trillion yuan annual green bond market by 2030, they said.
Japan in October unveiled goals to reach net-zero greenhouse gas emissions by 2050 and to cut emissions by 46% from 2013 levels by 2030.
In Japan, issuance of green bonds and similar “sustainability bonds,” backed by projects with both environmental and social benefits, almost doubled from 2019 to 2020, according to Daiwa Securities, one of the major underwriters.
“Many companies say they would issue” green or sustainability bonds but still have not finalized their plans, said Kazushi Shimizu, head of sustainable development goals finance at Daiwa. Once companies decide on their business plans, green bond issuance “will increase in the second half of the year,” Shimizu said.
Among those that just issued their first green bonds is Kyushu Electric Power, which this year announced a target of carbon neutrality by 2050. For the company, a green bond is a way to communicate that goal. “We wanted to let a wide variety of stakeholders know about what we are doing, ” said a company spokesperson.
At another issuer, the Japan Housing Finance Agency, green bonds brought participation from a more diverse group of buyers. “Investors who previously did not buy straight bonds purchased green bonds,” said Takashi Oida, director of the agency’s market operations department. “It helps to stabilize our financing,” Oida said.
The agency has been selling green bonds to finance loans for new energy-efficient houses since 2019. It just issued the country’s first government-guaranteed green bonds in June and aims to raise 220 billion yen ($2 billion) from such bonds in fiscal 2021.
Volumes are rising in South Korea, too. The nation’s ambassador for climate change, Yoo Yeon-Chul, last month promised policy changes to meet the country’s commitment to achieve carbon neutrality by 2050. Green bond issuance by South Korean entities has reached $10 billion so far this year, compared with $2.6 billion for all of 2020.
Changing regulations for money managers is also boosting demand for green bonds.
Hong Kong is proposing that fund managers integrate climate risks into investing practices and has asked financial institutions to include climate-related disclosures by 2025. China has launched a green bond-endorsed project catalog and the nation’s central bank has published green guidelines for the finance sector. And in Southeast Asia, the Monetary Authority of Singapore’s Green Finance Industry Taskforce (GFIT), is proposing that asset managers and banks identify a “taxonomy” of activities that can be considered green.
Such moves, along with bond returns that are in line with those from a traditional portfolio, are pushing local investors to integrate green investing into their portfolios.
The “interest so far in the region is just the tip of the iceberg, and the momentum is most certainly going to pick up given the developments of various schemes and targets,” said Jonathan Ho, an associate at BNP Paribas’s Asia-Pacific sustainable capital markets unit. “These will only open up new vistas for issuers and investors.”
Asian issuers have been able to price green bonds broadly in line with other conventional debt — unlike in Europe, where investors pay more to hold green bonds. In 2020, they commanded, on average, a 9 basis-point price premium over conventional bonds, according to the Association for Financial Markets in Europe. Bond prices move inversely to yields.
HSBC Asset Management’s emerging markets green bonds portfolio, launched in May last year, has logged a return in line with high-quality emerging-market corporate debt, Conxicoeur said.
Hong Kong conglomerate New World Development issued the world’s first sustainability-linked bond from a real estate developer in March, in an offering that was six times oversubscribed. Across Asia, demand for green bonds has exceeded supply, with order books for new issues in 2020 on average 5.7 times bigger than the volume of bonds available, according to Louisa Lam, a credit analyst at HSBC.
Investment decisions are made “on the premise that expected returns [of green bonds] are not less compared to other plain bonds,” said Ryo Kakimoto, fund manager at Japan’s Asset Management One.