With both growing demand and awareness, the value of ESG (environmental, social and governance) bonds issued in Asia, largely denominated in US dollar (USD), is expected to hit another new record of around US$90 billion-US$100 billion ($122 billion-$136 billion) in 2022, following a record poised to be made by the end of this year.
“ESG bond supply has grown tremendously over the past year, both globally and in Asia, as the ESG agenda becomes the number one focus among investors and issuers,” notes JPMorgan in its ESG Financing Outlook 2022, released on Oct 27.
Total assets under management (AUM) of ESG-dedicated funds in Asia ex-Japan reached US$35.3 billion by the end of the third quarter. This marks growth of some 95% y-o-y.
Asia ESG USD supply for 2021 is at a record high, making up US$58.6 billion of the US$67.4 billion total. Of this figure, 47% were ESG debuts.
Year-to-date (YTD) to Oct 22, global ESG bond supply more than doubled, increasing 128% y-o-y to US$513.3 billion.
Within Asia, ESG bond supply nearly tripled, increasing 189% y-o-y to US$67.4 billion. As at Oct 22, ESG bonds made up exactly a fifth of Asia’s bond supply YTD.
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Worldwide, ESG bonds accounted for 14% of total bond supply. Both figures are more than double what they were in 2020.
Last year, ESG bonds made up just 6.9% of Asia’s total bond supply, with that figure slightly lower worldwide at 5.8%.
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ESG bonds include green, social, sustainability bonds and Sustainability-Linked Bonds (SLB). Green bonds made up the lion’s share of Asia’s ESG bonds YTD at 68.1%.
Sustainability bonds made up slightly over a fifth of the pie, at 22.4%. Unlike the proceeds bonds above, SLBs have built-in penalties triggered if the issuers fail to fulfil certain criteria. These made up just 6.6% of Asia’s ESG bonds YTD.
That said, the year started off on a strong note, with Hong Kong’s New World Development (NWD) being the first real estate developer in the world to price a USD SLB.
The property conglomerate announced on Jan 8 that the 10-year US$200 million SLB with a 3.75% coupon rate was six times oversubscribed. The SLB comes with a sustainability performance target to achieve 100% renewable energy for its rental properties in the Greater Bay Area by the end of FY2025/26.
Should NWD fail to achieve the target, it will purchase carbon offsets equivalent to 25 basis points per year, from 2027 until the SLB matures in 2031.
JPMorgan and UBS were the joint global coordinators, joint bookrunners and joint structuring agents for the offering.
By sector, Asia’s ESG bond supply was dominated by issuers from the financial industry, contributing 36.9% of bonds YTD to Oct 22.
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Real estate issuers made up 23.2%, while power, utilities and energy issuers were third at 11.4%.
Across Asian countries, China issued nearly half of the continent’s ESG bonds, or 46%. South Korea issued 24.6%, while India issued 12.5%, higher than the entire Southeast Asia combined (10.7%).
China is aiming for carbon neutrality before 2060. “China is really putting out a lot of detailed plans and also a road-map to encourage all stakeholders to work towards this goal,” says Jessica Chen, co-head of ESG financing, Asia ex-Japan, at JPMorgan.
Chen highlights a recent announcement by the country’s highest executive body. According to a policy framework published by the State Council on Oct 24, China will work towards having 80% of its total energy mix from non-fossil fuel sources by 2060, and 1,200 GW of solar and wind generation capacities by 2030.
More listed companies in China are putting in effort for ESG disclosure, says Chen. “Quite a number of our clients have set up annual sustainability reports and kept close engagement with ESG rating agencies.”
Gradual transition
Despite the enthusiasm, JPMorgan also outlines some realistic considerations as Asia embraces sustainability. Asia and emerging markets are unique, says Puja Shah, co-head of ESG financing, Asia ex-Japan, at JPMorgan.
“We’re trying to find solutions and we’re moving towards harmonisation, so that the sector can be a little bit more coordinated in facing these challenges.”
Approximately 50% of Asia ex-Japan is fuelled by coal. The renewable energy transition will take time as countries manage the delicate balance between growth and development. “The transition between [countries in] Asia and some of the developed markets will be uneven. What is encouraging is that in our interactions with investors, they do recognise that there will be a difference and disparity in how this decarbonisation will happen,” says Shah.
In addition, the lack of a common and widely adopted reporting standard is hindering ESG initiatives. “This sector has grown explosively over the last 12 to 24 months. So, standardisation is one area of focus; there are differences in the way reporting is done at a corporate level. There is also disparity between the ways ESG ratings are given. So, this does create a little bit of imbalance in the way investors are able to judge reporting standards,” adds Shah.
That said, reporting standards such as those from the Task Force on Climate-Related Financial Disclosures and Sustainability Accounting Standards Board are being adopted gradually, notes Shah.
A number of issuers, especially those in carbon-intensive sectors, are focused on rolling out decarbonisation targets, though Scope 3 reporting remains a challenge, notes Shah. Scope 3 emissions refer to all indirect emissions that occur in a company’s value chain. This proves to be a pain for some more than others.
Earlier this year, Piyush Gupta, CEO of DBS Group Holdings, said: “In banking, since we deal with every sector, our Scope 3 emissions include the emissions of every sector. I have to get the same degree of transparency for steel, aviation, transportation, real estate, property, everything.”
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“This lack of methodology, of a good set of tools, means it is extraordinarily difficult for me to try and figure out what my Scope 3 is. It’s very complicated,” said Gupta.
JPMorgan notes: “Issuers need to strike a balance between ambition and what is achievable under constraints related to technology, fossil fuel reliance and access to lowcarbon raw material.”
Infographics: JPMorgan, Dealogic, Bloomberg
