Monday 17 Jun 2024
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This article first appeared in The Edge Malaysia Weekly on February 14, 2022 - February 20, 2022

SUSTAINABLE bond issuance in Asia-Pacific grew at a solid rate of 129% to US$165 billion (RM690 billion) last year, but is likely to moderate this year amid an environment of monetary policy tightening, says Moody’s ESG Solutions (MESG).

The rate of growth in the region last year significantly eclipsed the 64% achieved globally, according to Matthew Kuchtyak, MESG’s vice-president of outreach and research.

“After a number of years of steady growth, sustainable — including green, social, sustainability and sustainability-linked — bond issuance from the Asia-Pacific region surged in 2021, more than doubling to US$165 billion from US$72 billion in 2020. Given that sustainable bond markets tend to be less mature today in many Asia-Pacific countries compared with regions such as Europe, we expect that growth rates in 2022 will at least equal the 36% growth we’re projecting for global sustainable bond issuance,” he tells The Edge, citing historical data from the Environmental Finance Bond Database as at Jan 20.

MESG is a business unit of US-based Moody’s Corp that provides insights on environmental, social and governance (ESG) and climate issues.

According to Kuchtyak, the three leading countries for sustainable bond issuance in Asia-Pacific last year were China, which accounted for 38% of the region’s volumes, Japan (22%) and South Korea (14%).

“Given the size and maturity of the capital markets in these countries, we expect they will continue to be significant contributors to sustainable bond volumes. However, we also saw significant growth in issuance in 2021 in places such as Australia, Hong Kong, India and Singapore, and we anticipate this growth will continue in the coming years as the focus on sustainable finance accelerates in these markets,” he says.

In Malaysia, sustainable bond volumes remain relatively small to date, with only about US$1 billion of issuance in 2021, accounting for less than 1% of the volumes in the region.

“Nevertheless, we anticipate sustainable bond volumes in the country to grow over time given the development of the Malaysian Sustainable Finance Initiative and the launch of the government’s debut sustainability sukuk in 2021,” says Kuchtyak.

Sustainable bond issuance in the region tends to be dominated by green bonds, as per the trend observed globally. Green bonds accounted for 69% of the sustainable bond issuance in Asia-Pacific last year.

“This is beginning to diversify, however, with other labels and structures beginning to grow in popularity,” Kuchtyak notes, pointing out that sustainability bond volumes more than doubled to US$29 billion last year while sustainability-linked bonds emerged as an alternative structure of choice for some issuers, with US$8 billion of issuance.

“We anticipate this diversification will continue as corporates, banks and public sector issuers continue to finance a wider range of environmental and social investments,” he adds.

Growing as a share of total bonds

Globally, MESG expects the issuance of sustainable bonds to hit a record of US$1.35 trillion this year. This represents slower year-on-year growth of 36% compared with 64% in 2021, when issuance reached US$992 billion.

“Our projections take into consideration expectations of gradually declining growth rates over time as the market grows and matures, particularly in more established markets, as well as potential headwinds for overall global debt issuance in 2022 in a potentially tightening monetary policy environment,” it says in a Jan 31 report that Kuchtyak co-authored.

“In addition, the risk of global fragmentation in sustainable investment policies and practices, as well as growing scrutiny over the credentials of some sustainable debt instruments, may also weigh on the continuation of unfettered market growth.”

MSEG nevertheless anticipates healthy growth in volumes this year, given that the number of issuers embedding sustainability strategies into their capital market plans remains on an upward trajectory. As such, it sees sustainability bonds’ share of overall global bond issuance rising further to about 15% this year, from 11.3% last year and 6.7% in 2020.

“This increase in the share of global issuance [last year] came despite very high levels of overall debt issuance that rivalled the pandemic-fuelled records observed in 2020,” it notes.

Meanwhile, S&P Global Ratings says the EU and the US will lead global sustainable bond volumes this year. “The political and regulatory drive is supported by financing commitments such as the €800 billion Next Generation EU recovery fund and the US government’s support for the Climate Investment Funds’ new financing mechanism,” Michael Puli, its Singapore-based sustainable finance analyst, tells The Edge.

Nevertheless, he expects Asia to ramp up its contribution to global sustainable debt markets. “China’s size and government support for energy-transition projects will mean it is likely to continue to dominate the region’s issuances, followed by developed debt markets such as Japan and South Korea. Many countries in Southeast Asia, including Malaysia, are also stepping up financing efforts to address climate change and social inequality,” he adds.

S&P expects global sustainable bond issuance to surpass US$1.5 trillion this year from just over US$1 trillion last year, even as global bond issuance stagnates overall. This growth will be partly driven by the booming sustainability-linked and green bond markets as public and private sector issuers tackle their climate commitments, it says in a Feb 7 report.

It projects that sustainability-linked bonds will be the fastest-growing segment of the market.

 

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