Asia’s Carbon-Free Plans Boost Outlook for ESG Credit Issuance

(Bloomberg) -- Asia will need all the help it can get next year from more financing for environmental, social and governance projects, after recently setting some of the world’s most ambitious goals to end carbon emissions.

The region is the world’s largest greenhouse gas emitter, making the stakes for ESG bonds and loans all the higher. China pledged in September to go carbon-neutral by 2060. The next month, Japan said it would do so by 2050. The years sound distant, but the scale of the task means funding must ramp up immediately.

Issuance of bonds and loans earmarked for ESG projects slid about 12% this year in the Asia-Pacific region to the equivalent of $96.1 billion. That was due largely to declining green debt sales in China, previously a world leader. Social note offerings surged as authorities shifted their attention to the pandemic. Green loan volumes in APAC have fallen almost 47% to $19.8 billion. The drop in green finance contrasts with an increase in Europe and the Americas.

Cutting-edge designs could help boost the pace ahead. Overall, new ESG structures have been gaining traction, with the range of products expanding in Asia to include green interest-rate swaps. Another innovation that some borrowers may turn to in 2021 are transition bonds, which allow carbon intensive businesses to reduce their environmental impact even as they remain ineligible for ‘green’ labels.

Sustainability-linked notes, where coupons increase when certain ESG targets aren’t met, may also see further development after several sales this year. But the securities have prompted some investors to wonder if it’s really ethical to profit from a company missing its green or social targets.

While the menu of potential ESG financing options expands, one thing is certain. More money managers are trying to meet socially responsible mandates. That’s kept the cost of borrowing through such products lower compared with conventional debt in Asia, even as unprecedented monetary stimulus narrowed the gap this year.

Here are highlights across the region:

China

Japan

South Korea

India

• Prime Minister Narendra Modi has maintained his goal of transitioning the country to clean energy from mainly fossil fuels, and expects 40% of India’s power-generation capacity to come from non-fossil sources within two years
• Green loan volumes have more than doubled this year, one of the rare loan markets in Asia to witness this trend

Australia

Singapore

Southeast Asia

• Indonesian borrowers have the most ESG debt outstanding of any Southeast Asian country, with issuance from power company Star Energy Geothermal (Salak-Darajat) this year
• ESG borrowings from Thailand jumped more than three-fold this year to $2.4 billion

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