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Big growth in Asia-Pacific’s ESG finance set to speed up standardisation

Photo by Ansel Lee from Pexels
Photo by Ansel Lee from Pexels

With the region’s sustainable debt market nearly tripling last year, formal guidelines and definitions look likely to follow as policymakers are urged to express a view

The sustainable debt market in Asia-Pacific is booming. In 2021, the total value of new loans and bonds, including green, social and sustainability-linked instruments grew by 178 per cent to reach $298.8bn, according to research from Swedish bank SEB.

This explosion of activity, coupled with strong issuance in North America, helped to push Europe’s global share of the market down to 44 per cent for the year, marking a 10 per cent decline from 2020. Much of this growth is being driven by the issuance of cross-border bonds, and US investment bank JPMorgan expects US dollar-denominated environmental, social and governance (ESG) debt to hit about $100bn over the coming year.

Two key factors are driving this rapid growth. The first is the region’s ongoing recovery from the Covid-19 pandemic, as governments and the private sector alike push ahead with substantial financing plans. The second relates to the climate goals set by several big-hitting markets, including Japan, China and South Korea, as they strive to meet carbon neutrality objectives in the coming decades.

“I think you’re seeing these two themes […] converge. And then I think it’s just the industry itself: the financial sector in the region is really doubling down,” says Emma Herd, EY Oceania partner for climate change and sustainability services. “You’re seeing this in multiple markets. Some of the biggest players are really investing serious resources and setting some sizable targets of their own in terms of scaling up their sustainable finance business.”

Investing with care

Yet the expansion of Asia-Pacific’s sustainable debt market is not without its growing pains. For one thing, the complexity of the political landscape means that, for the time being, standardisation of sustainable capital markets frameworks remains low. As regional front-runners, such as China, establish an early lead in the development of consistent regulations and frameworks for the issuance of ESG bonds, other local markets have been much slower on the uptake.

“Asia-Pacific is a very complicated region, with multiple economies operating side by side so in that sense, it is not [a single market] like the European Union. But the potential for sustainable finance to drive real-world social and environmental impacts is huge,” says Herd.

Tapping into this growth opportunity today, however, requires careful consideration for global investors. For instance, the constituent markets of the Association of Southeast Asian Nations regional bloc (representing about 655 million people) have developed a set of green bond guidelines based on the International Capital Market Association’s green bond principles, contextualised to meet local conditions. Similarly, in Japan, the government has developed its own guidelines, also based on ICMA standards, but with local variations.

“As an investor, things are incredibly tricky because if you’re following some regulation or some standard – whether it’s from the National Development and Reform Commission in China [or another Asia-Pacific jurisdiction] – you need to be confident that that regime is going to be, if not the gold standard, at least globally recognised. Otherwise, you will still have to rebalance your portfolio later,” says David Howard-Jones, a partner at management consulting firm Oliver Wyman.

For this reason, many of the region’s sustainable debt instruments that are tailored for the international capital markets rely on external validation to attract investor interest. “This is why we see sustainable finance products looking for third party assurance around the sustainability claims in the product, because the market is still looking for that extra vote of confidence. More often than not, it’s independent assurance that’s bridging the gap [between market standards],” says EY’s Herd.

Growing sophistication

But as the Asia-Pacific sustainable capital market develops, this problem should eventually dissipate. As the size of the market increases, so too will the level of regulatory sophistication, for a variety of reasons.

Chief among these are ongoing dialogues through global forums such as the Climate Action 100+ initiative, an investor-led programme to push for climate action from the world’s largest greenhouse gas emitters, and the simple effect of ‘regulatory gravity’ stemming from large or sophisticated jurisdictions such as China or Singapore.

“Most funding markets over time find their way to develop structured and reliable pools of liquidity, because investors need certainty. It’s probably a good thing for investors and the market that the Asian ESG bond market is growing so quickly, because that means the standards become more accepted and more tested over time,” says Howard-Jones.

A service from the Financial Times