Asia’s Green Bonds Green Light
On the eve of its annual meeting, the Asian Development Bank, which has issued its own “green” bonds for clean energy projects, circulated a lengthy report from the ASEAN+3 local currency initiative calling for wider embrace of this structure to meet long-term low-carbon infrastructure funding under the UN’s Sustainable Development Goals and national plans. The Chinese government, which is furthest along in the region as a main component of the estimated $180 billion global market, sponsored the research to help bolster neighbors’ “modest” participation a decade after the European Investment Bank’s inaugural placement. In 2016 the mainland’s renimbi-denominated volume in the instrument was $35 billion, and elsewhere only Japan and Korea managed over $1 billion while Malaysia, the Philippines and Thailand had only single issues. Beijing has clear guidelines set by the National Development and Reform Committee, but “low awareness’ due to the lack of country policy and investor understanding is the prevailing trend in Asia where green bond markets are “immature” in comparison with Europe and North America, according to the analysis. It recommends an array of demand and supply promotion steps to create a viable project pipeline, which is the “binding constraint” since financing separately should be available.
Worldwide the buyer base is divided between traditional and environmental, social, and governance-oriented “impact” investors, with the latter taking half of recent activity in sample deals. Major providers like MSCI and Bloomberg have launched dedicated green share and bond indices, and stock exchanges in Shanghai, Shenzhen and Singapore designate these listings. The London-based International Capital Markets Association developed voluntary principles, and India is the only other example beside China in Asia of mandatory standards. Commercial banks are the leading names and the most common form is general obligation rather than project-specific. Green bonds carry marginally higher costs up to seven basis points due to stricter reporting requirements, but yields are ultimately identical to conventional offerings, market players believe. Among emerging currencies the Chinese renimbi dominates with a 10% global share as of June 2017, but the World Bank’s International Finance Corporation private sector-affiliate has also been active in Indonesian rupiah, Turkish lira, South African rand, and Brazilian real. The China Development Bank has been a top single name, and the asset class features prime credit ratings and average 5-10 year maturities which have catalyzed “tremendous” growth amid securities industry recognition of greater climate and fossil fuel risks.
A G20 study group in 2016 identified barriers which were repeated by ASEAN+3 investors and regulators, particularly the absence of shared definitions and norms. Asian issuers prefer official over industry direction, and await bond market linkage with Paris Agreement carbon reduction targets, possibly with new sustainability mandates for institutional managers. They noted faster approvals but the process can still lag conventional access, especially with controversies over “greenwashing” as natural resource lenders try to burnish poor environmental records. Regional representatives are observers for the Green Bond Principles first announced five years ago on proceeds use and disclosure, but they remain fluid and complex and the Chinese and Indian models do not reflect capacity and practice in other countries. Korea’s Hyundai Capital completed an electric vehicle flotation and Malaysia a solar plant sukuk, but East Asian banks have broadly avoided engagement. Responsible investing assets in Asia ex-Japan are miniscule at $50 billion or 0.2% of the total, and only a handful of houses have signed the UN’s Principles in that field. Green bond funds do not exist, and the proposed $2 billion pool between Europe’s Amundi and the World Bank unveiled at the Spring Meetings will likely dwarf all near-term potential launches combined.
The ADB calculates Southeast Asia’s infrastructure bill at almost $200 billion through 2030 and asserts that green versions are “well suited” to normal project and public-private partnership bonds. It urges “national inventories” of potential ventures, tax incentives and credit enhancements, and technical assistance and outside auditor fee coverage to advance the agenda. The central bank and securities supervisors can ensure financial institution exposure both as issuer and investor if they design an instrument regime and lower capital set-asides for such risk, the report argues. It envisions a cross-border green professional network to “scale up” this segment by finally planting roots, within fertile existing local currency bond size at trillions of dollars.