03.03.2021
By Shanny Basar

Asian Financial Industry Eyes Sustainability

Asia-Pacific has been running behind North America and Europe when it comes to adopting sustainability and ESG standards in financial markets. While progress remains uneven there are signs the region is catching up.

Global sustainable debt issuance was more than $530bn last year, up 63% from 2019, according to S&P Global Ratings with social bonds emerging as the fastest growing segment of the market as volume increased eightfold. Green bond issuance reached a record $270bn taking the market to more than $1 trillion in issued bonds since its launch in 2007.

However Asia Pacific’s share of total green bond volume fell to 17% last year from 25% in 2019. Market participants expect an increase in issuance this year as China has said it is aiming for carbon neutrality by 2060 and Japan by 2050.

Bertrand Jabouley, head of sustainable finance, Asia-Pacific at S&P Global Ratings, said: “Sustainability has been of rising interest to Asian issuers as they see a great opportunity to broaden their investor base and attract more western investors.”

Bertrand Jabouley, S&P

He noted that HSBC research found that order-books for Asian green bond issues in 2020 were on average 5.7-times bigger than the bonds available. Despite this strong demand, Asian green bonds do not have the yield premium seen in developed markets which the bank said may reflect different bond currencies and investor bases. HSBC also said approximately three-quarters of Asian dollar green bonds are investment grade – primarily bank, sovereign and quasi-sovereign bonds.

Jabouley said: “Sustainability does not mean that credit risk becomes less important as the Asian green bond market has seen its first default.”

Joep Huntjens, head of Asian debt at NN Investment Partners, added: “The governance in ESG has always been important in emerging markets as it is poor governance that has historically caused defaults.”

The Dutch asset manager has analysed 53 Asian corporate bond issuers that defaulted between 2008 and 2019 and found that 20 had weak corporate governance. Investors focusing on ESG risks were more likely to have spotted this red flag, while strong governance is also needed for issuers to meet their environmental and social targets.

In recent years the social and environment factors in ESG have become more crucial in Asia, especially to European investors. Huntjens expects sustainability issuance to increase, especially as more Asian investors are integrating ESG into their processes.

Joep Huntjens, NN IP

Huntjens also highlighted the increasing sophistication of ESG issuance in the region. For example, in January this year New World Development (NWD) Company, a property developer in Hong Kong, issued the first US dollar sustainability-linked bond by a real estate company globally and also the first in Asia (ex Japan).

He said: “The sustainability-linked bonds require the issuer to pay a higher coupon or another penalty if the set targets are not met while the use of proceeds is more flexible than for a green bond.”

NWD will purchase carbon offsets equivalent to 25 basis points per year if it fails to achieve 100% renewable energy for its Greater Bay Area rental properties by 2026.

Mark Chan, partner at law firm Clifford Chance, said in a statement: “We hope this offering will open the door for sustainability-linked bond issuances by other companies and financial institutions in the Greater Bay Area.”

In June last year Olam International, an agri-business listed in Singapore, and Deutsche Bank executed Asia’s first foreign exchange derivative linked to ESG performance. The Thai baht/US dollar forward allows Olam to receive a discount if it meets set targets supporting the United Nations Sustainable Development Goals.

As ESG has become more important, the need for reliable and comparable data has also risen, which can be patchy in emerging markets. Three years ago NNIP’s debt team in Asia set up a framework with the Dutch asset manager’s responsible investing team which analyses 58 key indicators for each issuer, including unlisted companies.

“We use three external ESG data providers but this is combined with our proprietary research and engagement to provide one score for the 170 issuers we currently cover,” added Huntjens.

Asian issuers’ ESG score can be compared to emerging market peers globally in NN IP’s firm-wide framework.

Huntjens said: “ESG scores in Asia and China tend to be lower than Europe and America and there is a big challenge in assessing unlisted fixed income issuers in the region.”

He expects ESG data to improve, especially for listed companies as exchanges such Hong Kong, Singapore and China have made ESG reporting mandatory while other countries have introduced voluntary guidelines.

Helena Fung, FTSE Russell

Helena Fung, head of sustainable investment, Asia Pacific at FTSE Russell, said there are different definitions of ESG between Asian countries but there are also signs of a greater awareness of the need for convergence.

“Last year Hong Kong introduced strong standards and TCFD disclosures are becoming more relevant,” she added. “International investors want standardisation, which is necessary to attract more overseas flows.”

The Task Force on Climate-Related Financial Disclosures issued a voluntary framework for reporting in 2017 which has been endorsed by more than 1,800 companies and 10 governments.

Fung added the demand from investors goes beyond green bonds to ESG becoming a core part of asset allocation and building an investment portfolio. She joined the London Stock Exchange Group’s and data provider in February 2020 in a newly created role for the region. Her previous roles include working for the responsible investment arm of Hermes Investment Management as global head of client relations.

“My appointment was indicative of an inflection point in ESG in Asia Pacific,” she added. “There are growing flows and a greater understanding of climate change as actions in Asia will have a global impact.”

She gave the example of Tunku Alizakri Raja Muhammad Alias, chief executive officer of the Employees Provident Fund saying that Malaysia’s largest pension fund aims to integrate ESG into all its investments by 2030. On Bloomberg Television he described ESG as a vaccine for any crises as sustainable assets declined at a lower rate than other assets during the Covid-19 pandemic.

Fung said: “The region is at the tipping point of an increase in ESG products as there is demand but the market is underserved. There will not be an overnight scaling up of ESG assets but there will be gradual growth in equities and fixed income.”

She continued that FTSE Russell is very active in engagement and education on ESG in partnership with the exchanges in Singapore, Malaysia and Taiwan.

“They play an influential role in building the ecosystem and, if this leads to reducing emissions in APAC, this will have a big global impact,” added Fung.

The Singapore Exchange launched its first ESG derivatives this year. SGX’s four index futures were developed in partnership with FTSE Russell and were certified by the Commodity Futures Trading Commission, enabling them to be traded directly from the U.S. SGX had launched a sustainability program last December to expand its capabilities and introduce new ESG-focused products, services and platforms.

FTSE Russell constructs the FTSE4Good index series which was launched in 2001 for companies with high ESG standards.

Fung said: “We have added a second threshold focused on climate performance based on Transition Pathway Initiative (TPI) scores, which takes into account both carbon emissions and how effectively a company manages climate change risks.”

The Transition Pathway Initiative is a global, asset-owner led project which assesses companies’ preparedness for the transition to a low carbon economy.

“Emerging market companies are going to be more adversely impacted so we are increasing engagement and stewardship,” Fung added.

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