Green, blue and now brown: Why transition bonds offer an exciting opportunity for ASEAN

By Rahul Sheth, Executive Director, Debt Capital Markets and Head of Sustainable Bonds, Standard Chartered Bank

The ASEAN region has a positive track record of the supporting and innovating solutions that advance the sustainability agenda, and despite the disruption caused by Covid-19, the pandemic has not slowed down efforts by governments or companies to create a sustainable future. Singapore, for instance, has committed to delivering a green Covid-19 recovery including providing support to help companies reduce their carbon footprint, and boosting efforts to grow and create jobs in green industries.1

One high-profile area where ASEAN companies are making a difference is through sustainable finance. The volume of ASEAN green bonds and loans jumped to US$25.4 billion in 2020, up from US$17.5 billion the previous year, with proceeds used for areas including renewable energy, transport, water and waste.2

And sustainable finance is not limited to green bonds. Standard Chartered has supported clients to issue blue bonds – which help combat ocean pollution - and sustainability bonds, which finance projects aligned with the UN Sustainable Development Goals.

Balancing economic development and sustainability

However, funding through green and blue bonds is not available to all companies. Businesses in industries that are greenhouse gas intensive – such as transportation or energy -  are often not eligible to sell bonds under the green or blue banner. Even so, the development of these industries remains vital to ASEAN’s growth and prosperity. Research from the Asian Development Bank shows that coal-fired generation is set to grow faster than every other energy source in Southeast Asia. By 2030, the share of coal generation will reach 42%, up from 36% in 2014.3

At the same time, it’s important these industries take steps to reduce their carbon footprint. Emerging markets like ASEAN face many of the world’s pressing sustainability challenges such as air pollution, climate change, declining ocean health and water scarcity.4 The World Health Organisation estimates that over one third of the global, annual seven million premature air pollution-related deaths are in Asia and the Pacific.5

Making the transition from brown to green

This is where transition bonds can make a difference. As the name suggests, transition bonds offer a brown to green - or to a less brown story -  thereby providing a fundraising opportunity for carbon-intensive companies that want to reduce the environmental impact of their business and create long-term sustainable change.

In broad terms, the proceeds from transition bonds can be used for projects which deliver a significant and/or long-term reduction in carbon emissions. This could be an airline investing in more energy-efficient aircraft6 or an energy company financing a power station that uses less carbon-intensive fuel.7 Companies will need to consider the carbon abatement technologies available to them before making an investment.

Momentum is building

While the transitions bonds are a recent addition to the sustainable finance menu, issuers and investors alike have been keen to embrace the format. For instance, companies including UK gas distribution firm Cadent,8 Hong Kong energy provider CLP Holdings,9 Abu Dhabi’s Etihad Airways10 and Italy’s Snam11 have already sold this type of debt. And ASEAN looks set to join in with news reports suggesting the Asian Development Bank and Indonesian state-owned electricity company PLN plan to issue a transition bond this year.12

Transition bonds offer a great opportunity to help achieve ASEAN’s sustainability objectives but it is important to note the potential for ‘green washing’ may be greater than with green bonds and loans. To successfully transition, companies must make a long-term commitment to achieving certain, stated goals. As the idea of what constitutes genuine ‘transition’ is bespoke to each industry and region of operation, it is a much more fluid concept compared to more established ‘green’ objectives.

Recognising the challenge of ‘transition washing’ the financial industry is taking action to set standards that ensure transition finance remains credible and creates a positive change. For example, in 2019 AXA Investment Managers introduced guidelines for investing into transition bonds while Mirova is planning a €1bn energy transition fund.13 More recently, at the end of last year the International Capital Markets Association (ICMA) released a guide for borrowers looking to issue in this new format.14 The handbook includes advice on creating a transition strategy and recommended disclosures.

At a time when customers, shareholders and employees increasingly expect companies to demonstrate their commitment to sustainability, transition bonds provide infrastructure and transportation companies a way to start the journey from brown to green.

Whether it’s green, brown or blue, bond issuance offers an important way for companies to advance their sustainability agenda and contribute to a sustainable future for all.

1 https://www.mse.gov.sg/resource-room/category/2020-08-27-speech-mse-addendum-to-the-president-address

2 Bloomberg, Dealogic and Refinitiv

3 April 2020, Report on Supporting Sustainable Finance in ASEAN for AFCDM-AFMGM https://asean.org/storage/2012/05/Report-on-Promoting-Sustainable-Finance-in-ASEAN-for-AFCDM-AFMGM.pdf

4 https://www.adb.org/sites/default/files/publication/639141/green-finance-post-covid-19-southeast-asia.pdf

5 https://www.adb.org/sites/default/files/publication/639141/green-finance-post-covid-19-southeast-asia.pdf

6 https://www.etihad.com/en/news/etihad-becomes-first-airline-to-issue-sustainability-linked-sukuk

7 https://www.hkex.com.hk/-/media/DB5A18720BC14F588CF78E83B34B81AC.ashx

8 https://cadentgas.com/about-us/our-company/investor-relations/overview/transition-bond-framework

9 https://www.hkex.com.hk/-/media/DB5A18720BC14F588CF78E83B34B81AC.ashx

10 https://www.reuters.com/article/etihad-sukuk-idUSL1N2HJ13Z

11 https://www.snam.it/en/Media/Press-releases/2020/Snam_successfully_launches_the_first_Transition_Bond.html

12 https://www.thejakartapost.com/news/2020/11/03/adb-pln-to-pilot-issuance-of-energy-transition-bonds-in-2021.html

13 https://www.axa-im.com.sg/content/-/asset_publisher/FehknnI2EsIG/content/financing-brown-to-green-guidelines-for-transition-bonds/26520

14 https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/Climate-Transition-Finance-Handbook-December-2020-091220.pdf

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