The year 2019 marked the second anniversary of ASEAN’s inaugural bond issue under the organisation’s common Green Bond Standards (GBS) – a RM2bn ($480m) issue by the Malaysian government-controlled asset manager, Permodalan Nasional. Since then, the green bond market in Asia Pacific has won many accolades, with 2018 seeing the region record the second-highest volume of outstanding, climate-aligned bonds worldwide, according to a study by the London-based Climate Bonds Initiative (CBI). The CBI documented a record $389bn in outstanding green bonds around the world for 2018, up $72bn on 2017. Demand for these products is growing across the region as investors seek ethical investment vehicles for funding infrastructure projects that adhere to sustainability principles.
Many international fund managers have been ratcheting up their social and environmental impact investments. A February 2019 survey from Bloomberg and Morgan Stanley found that 75% of US asset management firms offered sustainable investment strategies, up from 65% in 2016. Yet, within Asia Pacific, ASEAN continues to rank behind China in terms of the volume of green bond issuances. In 2018 some $55bn in green bonds were outstanding in China. Meanwhile, ASEAN accounted for $14bn of climate-aligned bonds, showing that the market still has substantial room for further growth. A 2016 report by Singaporean bank DBS and the UN Environment Programme suggested that demand for additional green investment in the ASEAN region from 2016 to 2030 would be around $3trn. This includes projects in areas such as sustainable agriculture, energy efficiency, renewable energy and land-use management, with the private sector expected to finance around 40% of the total. Given such strong demand for major infrastructure and energy projects, the period ahead may see ASEAN challenge China’s green bond dominance.
Setting the Standard
Green bonds are debt instruments that can be issued by governments, banks, municipalities or corporations with the objective of raising funds for sustainable projects that attempt to alleviate climate change challenges. Labelled as “green” by their issuers, they can take the form of private placements, securitisation, sukuk (Islamic bonds), covered bonds or any other debt format. Among the ASEAN member states these types of bonds have been issued for some time. The first green bonds were issued in 2016 by the Philippines and Vietnam. With variations between bonds in terms of what constitutes a green investment – along with diverging standards of assessment, degrees of transparency and external monitoring – potential investors were faced with the challenge of undertaking their own due diligence on a case-by-case, country-by-country basis. To address this issue and introduce an ASEAN-wide watermark for green bonds, the ASEAN Capital Markets Forum (ACMF), which brings together regulators from the 10 member states, developed a set of common standards.
The standards require the issuer to have a geographic or economic connection to the region; exclude all fossil fuel power-generation projects; and require that the project provide clear environmental benefits. Investors must be continuously supplied with information on project evaluation, management, selection and a wide variety of topics. A large part of this information must also be made publicly available, to boost overall transparency. Issuers are encouraged to report multiple times a year, and the appointment of an external reviewer is also encouraged – although not currently obligatory. The guidelines further place a requirement on any external reviewer to have a proven and demonstrable track record in reviewing green projects. The ASEAN GBS were launched in November 2017, with Malaysia launching the first GBS-compliant bond in January 2018. Since then, other ASEAN countries have adopted the standards, including the Philippine Securities and Exchange Commission in August 2018. February 2019 saw the Philippines’ first GBS-compliant bond, a P15bn ($279m), 1.5-year bond issued by the Rizal Commercial Banking Corporation. Singapore firms were among the first to issue, with Sindicatum Renewable Energy issuing two tranches of green bonds worth INR2.5bn ($37m) in January 2018 on the London Stock Exchange to finance projects in India, and a P1.06bn ($19.7m) bond to do the same in the Philippines in August 2018. Thailand has also been keen to participate in the GBS-compliant bond market. Thailand-based B Grimm Power Public Company issued two tranches of green bonds worth BT5bn ($154.5m) in December 2018, while Kasikornbank issued a $100m sustainability bond in October 2018.
Sustainability bonds raise financing exclusively for a combination of green and social projects; the ACMF has also issued guidelines for these, as well as for social bonds. The latter are debt instruments that raise funds for schemes with positive social outcomes, such as affordable housing, health care, education projects and empowerment programmes. The ASEAN Social Bond Standards and the ASEAN Sustainability Bond Standards were brought on board in October 2018.
Due to ASEAN’s structure, member states interact as an alliance rather than a common market. While the GBS offer a clear framework for green bond issuance, they do not constitute an obligatory, ASEAN-wide rule book. Member states have therefore been free to take account of the standards or use them to develop their own. In Indonesia the ASEAN GBS were used alongside the International Capital Market Association’s principles when the Financial Services Authority in Jakarta came up with its own standards for green bond issuance in December 2017. These standards are therefore in alignment with the ASEAN GBS and formed the framework the region’s first sukuk sovereign green bond, launched in February 2018. This $1.25bn bond funds a range of environmentally friendly projects in tourism, energy and waste management. Indonesia is quickly emerging as the leading green bond market in ASEAN. In the first 11 months of 2018 the country was the largest source of green bonds in ASEAN by volume, responsible for some 39% of the bloc’s total. In second place was Singapore, with 35%, and in third was Malaysia, with 19%. The rest of the ASEAN market was shared by the Philippines, Thailand and Vietnam, with member states Brunei Darussalam, Cambodia, Laos and Myanmar yet to commence the process of initiating green bonds. Myanmar’s capital markets are still in their infancy, yet there is already discussion of green bonds as a future market development instrument that could be useful in addressing the country’s significant infrastructure deficit, which is estimated at some $112bn through to 2040 by the G20-backed Global Infrastructure Hub.
With standards now set, the ASEAN green bond market can potentially offer investors a reliable seal of approval for sustainable and climate sensitive projects. Purchasing such bonds enables investors to boost their green credentials and satisfy the demands of increasingly environmentally conscious businesses and investment funds. For sovereigns, the green bond market also offers a way to meet obligations under international agreements, such as the UN-backed Paris Agreement on Climate Change. Within ASEAN, green bonds that meet clear and sound standards can also offer other advantages. In the case of Singapore and Malaysia, these can take the form of straightforward incentives. The Monetary Authority of Singapore (MAS) offers a green bond grant scheme, whereby issuers can claim up to S$100,000 ($74,300) to offset the costs of undertaking the external reviews necessary to meet the ASEAN GBS. In Malaysia, meanwhile, issuers of Islamic green bonds under the country’s Sustainable and Responsible Investment Sukuk framework are entitled to claim certain tax deductions.
Green bonds also offer the ability to scale up projects in areas such as renewable energy sources, as they make greater amounts of finance available. This in itself can make projects more bankable, reducing risk to investors and boosting confidence. The bonds also address a widespread challenge in ASEAN – that of access to finance for small and medium-sized enterprises (SMEs). Traditionally, SMEs have had to rely on their own or family funds, or high-interest loans from banks and non-banking financial institutions, to finance projects. Green bonds, however, offer a way to raise capital away from the banks – and through a mechanism that also helps strengthen an often nascent local capital market can be advantageous in terms of pricing. “The rates of green bonds are much more competitive than those offered by banks to many companies in the sector,” Gary Espino, president and COO of the Philippines’ Pure Energy, told OBG.
Furthermore, green bonds are becoming an attractive channel for bringing in international infrastructure funds that focus on emerging and frontier markets. One such channel is the Private Infrastructure Development Group, founded by six governments and the International Finance Corporation (IFC) to pioneer infrastructure investment in developing countries. The PIDG owns a range of specialised financing and development companies, including InfraCo Asia and GuarantCo, both of which have operations in the ASEAN region. InfraCo Asia has become an active investor in sustainable infrastructure projects across the region, aiming to de-risk projects and catalyse private investment before exiting and recycling the capital. InfraCo Asia’s CEO, Allard Nooy, cites two main advantages of green bonds in addressing the financing gap. “First, although green financing is not new, it receives considerable attention from commercial lenders and legislatures. Second, bonds in general are becoming a more viable financial instrument, particularly to refinance existing projects,” he told OBG.
The main advantage of green bonds is that they enable the corralling of investment in green projects, which themselves help countries to deliver on their targets for long-term, sustainable growth. Indonesia is a good example of this, as it is one of the world’s top emitters of greenhouse gases and has a government that has committed to reducing emissions by at least 29% by 2030. To help achieve this, renewable energies such as wind and solar are to take a greater share in power generation. By 2025 the target is for renewables to make up 23% of the energy generation mix, up from 12% in 2017. This requires major investment in green projects, and issues such as the $1.25bn sovereign green bond in February 2018 are part of the drive to finance non-fossil fuel energy infrastructure. The IFC, meanwhile, estimates that the construction of new green buildings alone in Indonesia, the Philippines and Vietnam will be worth some $345bn by 2030, with Indonesia responsible for $209bn. Investment in greener transport in Indonesia would be worth $20bn. In the Philippines investment in renewables is expected to account for up to $11bn over the same period.
While the development of the ASEAN GBS and growth in issuance within the region has been encouraging, there is still room for further expansion and development. Some challenges are common to bond markets across the region, such as shallow markets without a fully developed longterm yield curve, while a lack of major institutional investors and a narrow range of products also restrain growth. For green bonds there is also the additional cost of measuring up to the stipulations of the GBS. The relative novelty of the market, coupled with the less developed nature of the financial sectors in some of the ASEAN member states, means that expertise in assessment and review is often lacking domestically, as are domestic investors themselves.
A further obstacle is the frequent absence of a linkage between national goals on environmental protection and green bond market development. A more coordinated approach may see government incentives for green bonds that finance particular areas targeted by determined national contributions under the Paris Agreement.
Lastly, ASEAN banks issuing green bonds face the obstacle of international investors’ unfamiliarity with domestic lenders. This may lead to some reticence to commit, even if the bank has a high credit rating. One way to counter this is via international agencies, such as the IFC, acting as effective guarantors for the domestic players. When the IFC worked with European asset management giant Amundi to set up the Amundi Planet Emerging Green One fund in 2018, some $1.42bn was mobilised to boost the capacity of emerging market banks to fund climate-smart investments. Such cooperative efforts may well be the way forward until ASEAN banks become more established in international markets. The urgency for ASEAN member nations to address the issue together is clear, as all member countries face an outsized risk when it comes to climate change. The Asian Development Bank estimates GDP could decline by up to 11% across the region as a whole by the end of the 21st century, due to the impacts of climate change on key sectors including fisheries, tourism and agriculture, and on labour productivity.