We are entering a new era of green finance. Global leaders and corporations are doing more to reduce their impact on the environment, and the transition to a greener, more sustainable future presents both new opportunities for business and much-needed investment into emerging markets.
The 2015 Paris Climate Agreement (PCA) further galvanised commitments to green initiatives and technology across the globe. As a result, we’ve seen unprecedented growth in the issuance of green bonds – bonds linked to climate change solutions.
According to the Climate Bond Initiative (CBI), the market saw more than 90 new issuers last year. We believe this brought total green bond issuance to over USD85 billion in 2016 – more than double the 2015 figure.
Green bond issuance could reach USD150 billion this year, according to the Climate Bond Initiative
The green bond market continues to mature and diversify, and demand from investors – regardless of whether they have a green mandate, currently far outstrips supply.
Despite US President Trump pulling out of the PCA, it has not stopped US companies contributing. Apple, for instance, reaffirmed its commitment to the environment by issuing a mammoth USD1 billion worth of green bonds last month, building on its USD1.5 billion issuance a year ago.
We can also expect more issuances from sovereigns, as governments seek to finance infrastructure development on a large scale on the back of the PCA agreement.
This could see green bond issuance reach USD150 billion this year, according to the CBI, and the OECD expect issuance to reach up to USD720 billion a year by 2035.
ASEAN is lagging behind
Despite the flurry of activity worldwide, the Association of Southeast Asian Nations (ASEAN) has been hesitant to venture into the green bond market, something which was a hot topic at a recent annual green bonds conference we held in Singapore.
Most of ASEAN is still undergoing rapid modernisation, and the region is expected to grow by a robust 5.2 per cent between 2016 and 2020 according to the OECD. Much of ASEAN’s infrastructure and industry is also still under development, which presents a rare opportunity to bypass traditional polluting, resource-inefficient technologies and practices in favour of sustainable ones.
There is an initiative in place to develop so-called ASEAN Green Bond Standards, which should be a great first step in tackling the issues faced by the market. Based on the International Capital Market Association’s Green Bond Principles, the standards are expected to provide consistency and transparency.
Governments need to be enablers of green bonds, introducing policies on both the supply and demand side
Standards will also help to eliminate ‘greenwashing’ – the practice of using proceeds from green bonds towards non-green purposes. There will be a set of principles for classification and information disclosure, which will go a long way to maintaining the credibility and integrity of this new market and help promote this ASEAN asset class to global investors.
The Green Bond Grant scheme introduced by Singapore’s financial regulator should also help the market get on its feet. The scheme, which aims to offset the cost of external reviews for green bond issuances, shows how policymakers can encourage the growth of green bonds.
These steps all indicate that ASEAN governments have taken notice of the burgeoning green bond markets in neighbouring China and India. But more has to be done. Governments need to be enablers, introducing policies on both the supply and demand side, to promote market confidence and spur growth.
The investor point of view
As for investors, the rationale for holding green bonds in your portfolio is strong. Green bonds and conventional bonds are comparable in almost every aspect, but green bonds have exposure to sectors with environmentally friendly businesses, allowing investors to further diversify their portfolio.
Policy makers play a large role in developing ASEAN’s capital markets for green bonds, but issuers and investors need to come together in a collective effort to develop the market. If this happens, there is huge potential in the ASEAN green bond market for all market players to capture.