BankingNeed for consolidated standards for green bonds in APAC

Need for consolidated standards for green bonds in APAC

Investors and issuers green bonds in Asia expect an alignment of standards to take place as this asset class is gaining traction in the secondary markets.

According to the consensus reached by experts during a panel discussion at the 13th Asia Bond Markets Summit, the dearth of consolidated standards for issuance is a big hindrance for green bonds in the Asia Pacific region.

The regional green bond market is seeing more diversified investors such as new green-focused funds and asset managers. More green bonds are also expected to be issued by corporates in various industries.

The global green bond market has grown at a rapid pace since the first issue in 2007. Globally, new green bonds worth $167 billion were issued in 2018, with the Asia-Pacific region accounting for around 30 percent of the total. According to the Climate Bonds Initiative, green bonds will expand to $250 billion in 2019.

Demand for green bonds is outstripping supply, as institutional investors come under increased pressure from clients looking for investment projects that help rather than hinder the environment. Green bonds are fast becoming an essential treasury tool.

Research on the burgeoning green bond market by Nordic corporate bank SEB predicts that demand this year will extend to new regions and sectors and will rise to at least US$125bn, with a potential upside of US$150bn.

Segmentation in the green bond market

The proliferation of various standards, including international, regional, and domestic standards issued by regulators in China and the European Union, has resulted in segmentation in the green bond market.

The formation of a set of unified standards for green bonds should depend on the understanding of the investors who are the key movers of green bond issues. Asset managers and asset owners have begun to incorporate environmental, social, and governance (ESG) principles into their fundamental research but this is expected to be a long-term process.

Until recently, a regulatory environment that favours investor protection over market development and multiple ESG standards was stifling the growth of Asian green bonds.

Rise of green bonds in Asia-Pacific region

The total issuance of green bonds in the Asia-Pacific region rose from an estimated $43 billion in 2017 to around $50 billion in 2018.

Hong Kong has emerged as an Asian capital markets hub for green bond issuance, with an estimated $11 billion in green bonds issued in 2018. The rapid growth of green bonds has been driven by large-scale new green bond issuance in China in 2017 and last year. China has opted to embrace green finance as part of its 2015 five-year plan. Last year, China’s green bond issuance totaled $34 billion, with Chinese lenders responsible for more than 50% of total green bond issuance by banks, according to data compiled by the ratings agency S&P Global.

In India, Adani Green Energy, the renewable power arm of Gautam Adani-controlled Adani Enterprises, is set to raise $500 million through an overseas bond sale. GMR group controlled Delhi International Airport (DIAL) raised $350 million via similar type of issuance where bonds were priced at 6.45 per cent, 30 bps tighter than the 6.75 per cent initial guidance.

Sustainable finance in Asia is increasingly proving it can generate strong returns and address risks posed by issues like climate change as well as offer valuable portfolio diversification opportunities.

While these early developments are fueling sustainable finance’s burgeoning momentum, greater levels of innovation and market-building efforts are necessary to truly exploit its full potential.

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