Green bond opportunities in Asia poised to grow
The fourth annual meeting of the ICMA Green Bond Principles took the organization to Hong Kong in mid-June, after Paris and London in previous years.
This year’s conference location came as an acknowledgement of Asia’s importance for the development of the green bond market. The global dimension of the green bond market is also recognized by Société Générale, hosting its first Asia Sustainable & Positive impact finance conference on 5 July in Singapore. As the world’s largest issuer of green bonds, China in particular is a driving force in the development of the green bond market. While the overall proportion of Asian green bonds has decreased from over 40% in 2016, to under 30% in 2017 and just 15% in 2018YTD, according to Societe Generale Corporate and Investment Banking data, the region’s potential for green bond issuance to address environmental challenges remains significant.
Despite a great variety of green bond issuer types and issuance formats, issue volumes remain largely driven by policy. The largest issuers include supranationals, development banks, local authorities and, more recently, sovereigns, which together have made up 55% of total green bond issuance in 2018 to date (Societe Generale Corporate & Investment Banking data). Policy is also increasingly shaping the format of green bonds, with different regulatory requirements for green bonds emerging across the globe. As early as 2015, the People’s Bank of China released green bond guidelines. At the end of May 2018, the European Commission published its proposal for an EU taxonomy to be referenced in the forthcoming EU green bond standard.
Irrespective of issuer region and local green bond rules, international ESG investors continue to look for a second party opinion confirming alignment with the ICMA green bond principles. The respect of regulatory and ICMA GBP standards does not protect issuers from all controversy though, nor will it necessarily open the doors to dedicated green funds. The issuer’s overall ESG profile and, most importantly, its governance, are often the very first screening and exclusion criteria for investors.
An issuer does not have to be green to issue a green bond, but it has to be serious about sustainability and transition to a greener company profile.
Societe Generale’s Head of sustainable bonds
While some investors have the resources to do their own analysis of ESG factors, others rely on external providers such as extra-financial rating agencies for a first screening, excluding those issuers with insufficient ESG scores from their green bond or ESG funds. A gauge of the seriousness of a new green bond issuer can also be its commitment to regularly return to the green bond market: confidence in the future availability of eligible assets indicates a strategic commitment to sustainable activities.
Green bond investors are also looking for diversification in terms of sectors and issuer credit profiles, the limited universe of issuers making it difficult to build balanced portfolios. Some fund managers are therefore voicing their support for companies from more controversial sectors to join the green bond issuer universe, such as chemicals, packaging or transport. The limited availability of eligible green assets within these more difficult sectors makes it however often challenging for companies to issue bonds in sufficient size for index inclusion. Diversification may therefore sometimes come at the expense of liquidity.
Growth sectors in Asian green bonds will be shaped by pressing issues, such renewable energy production and the needs of smart cities.
You have water treatment, waste management and that entire necessary infrastructure to bring to the cities. We think that there are some real opportunities for us to accompany our clients in these initiatives,
Deputy Chief Executive Officer of Societe Generale,
The enthusiasm about green bonds’ contribution to climate change mitigation and adaptation is often tempered by the fact that green bond pricing remains driven almost exclusively by the issuer’s credit profile rather than the environmental benefit of its activities. Yet this may change eventually, as green bonds are garnering momentum across the globe, with events such as the ICMA’s GBP annual meeting generating great engagement across issuers, investors, policy makers and civil society.