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September 5, 2022

Explaining green bond differences across Asia-Pacific

Asia-Pacific became the second most active market after Europe in 2021, but the region remains highly fragmented when it comes to green frameworks.

A combination of taxonomies, local initiatives and market opportunities are behind the growth of green bond issuances in Asia-Pacific, with varying effects across the region, according to a new study by investor services group ISS.

Asia-Pacific undertook North America as the most prolific region for green bonds after Europe in 2021, with some $129.5bn issued by companies in Asia-Pacific that year – the equivalent of a third of all green bonds from the region, according to Climate Bonds Initiative data.

ISS looked at markets in China and Thailand in particular. The former, which issued about $68.2bn of green bonds last year, its own taxonomy, the SDG Finance Taxonomy China, and is also developing a Common Ground Taxonomy, which aims to align standards between China and the EU.

In contrast, Thailand issued around $1.8bn of ESG bonds in 2021. It does not have its own taxonomy but uses the Association of Southeast Asian Nations’ Taxonomy for Sustainable Finance, which seeks to become an overarching guide for all ASEAN member states, catering to their different economies, financial systems and transition paths.

Different taxonomies

When comparing the benefits and drawbacks of regional and local taxonomies, Marie-Bénédicte Beaudoin, head of second-party opinion operations at ISS’s ESG division, says: “The multiplication of taxonomies could be a risk, as there could be as many taxonomies as there are countries.” For this reason, regional and international dialogue is necessary in order to avoid blurring the message to both issuers and investors, she says.

However, she adds, the development of local taxonomies may be necessary to “underline local specificities prior to a potential regional alignment”. For instance, local corporations may not yet meet the international standards required to issue sustainable instruments, and so local taxonomy developments could help prepare them to enter the sustainable finance markets.

Beaudoin adds that each country has specificities that relate to their local development. For example, not all emerging markets would have the same development needs in terms of their transportation infrastructure, energy or healthcare.

For example, China’s green finance policy has a goal of reaching carbon neutrality by 2060, which has given rise to abundant low-carbon transition project opportunities. In 2021, 61 per cent and 35 per cent of the country’s green bond categories for its use of proceeds were for renewable energy and low-carbon building, respectively.

Meanwhile, the Thai ministry of transport published a 20-year transport system development strategy for 2018-2037, with a focus on building a green public transport system using alternative energy. ISS expects that, given the strong government support and public-private partnerships available, there will be new opportunities to finance sustainable transport infrastructures, which may boost Thailand’s green bond market.

“Having a holistic view on how emerging markets evolve in the sustainable finance space is helpful to identify dynamics,” says Beaudoin. “However, it is essential to keep underlying specificities in mind when analysing those dynamics.”

Overall, sustainable finance issuances surpassed $1tn in 2021, according to CBI’s data that include bonds issued to finance green or social projects, or a combination of the two, as well as bonds linked to the overall sustainability strategy of issuers and those that relate to companies’ investments to transition to greener business models.

Half of all 2021 issuances were green bonds; and half of all green bonds, or $265bn, originated in Europe. However, the emerging market green debt contribution increased to 21 per cent in 2021, from 17 per cent in the previous year.

Meanwhile, social bond issuance increased in almost every region. Europe was the largest source of social debt in 2021, responsible for $101bn or 46 per cent of the total. However, the Latin America and Caribbean region saw the greatest development in 2021, growing by 338 per cent on the previous year to $11.5bn.

A service from the Financial Times