Emerging markets in Asia are embracing the use of green, social, sustainability and sustainability-linked bonds and loans as a growing number of governments and companies make public commitments to the transition to net zero carbon.
Investors and intermediaries such as banks and insurers have an important role helping ensure the transition is orderly and measured by considering the varying development paths of each country.
"The emerging development of carbon credits to mitigate and offsets will certainly assist countries as well as hard to abate sectors to reach 2050 net zero carbon.”
Market development in the Asia Pacific is nearing a point where every bond issuer and loan borrower benefits from a well-articulated sustainability strategy - even if issuing a vanilla loan or bond.
This demand for a strong and clear corporate approach linked to the issuer’s financing strategy is most evident in the developed markets of Australia, Hong Kong, New Zealand and Singapore.
Confidence
The adoption of the disclosure standards and reporting guidelines set out in the FSB Task Force for Climate-Related Financial Disclosures (TCFD) and other regulatory initiatives by more Asian governments and companies will increase investor confidence in debt issuance from the region.
Global disclosure and reporting regimes are continually expanding as the GSSS market evolves. Established in June 2021, the Taskforce on Nature-related Financial Disclosures (TNFD) is the latest global market-led initiative which aims to provide financial institutions and corporates with a more complete picture of their environmental risks and opportunities. (ANZ is among over 100 organisations to join the TNFD Forum.)
The TNFD has a target to publish a risk management and disclosure framework for organisations to report while acting on evolving nature-related tasks in 2023, building on the success of TCFD.
Sustainability reporting – though in its infancy in some emerging markets - is evolving rapidly. The International Sustainability Standards Board is developing new sustainability disclosure standards to provide a global baseline for integrating climate-related and sustainability disclosures into annual financial reporting.
The new framework will improve uniformity and expand standards as well as the quality and reliability of environmental social and governance (ESG) data. These enhanced data will allow investors to calculate relative value across their portfolio, helping increase investor confidence and ultimately drive growth.
Already, Singapore has mandated TCFD disclosures from 2023 for issuers in the financial, energy, agricultural, food, and forestry sectors with the materials, building and transportation industries to follow from 2024.
Improved disclosure and data are also expected to help quell growing scepticism in the investor market and the public at large about the commitment of companies and governments to net zero. The International Monetary Fund had flagged greenwashing risk in its October Global Stability Report.
Financial institutions also face greenwashing risk as underwriters, bookrunners and issuers of GSSS credit. It is the role of the sustainability coordinator to work with companies to structure meaningful and ambitious sustainability targets, ensuring sustainable finance transactions reflect best practice and can withstand market scrutiny.
Despite rising interest rates, issuers are not expected to hold off tapping markets as the surge to decarbornise continues unabated.
The emerging development of carbon credits to mitigate and offsets will certainly assist countries – both emerging and developed - as well as hard-to-abate sectors, to reach 2050 net zero carbon.
Firms such as Carbon Count – which provides data to calculate carbon levels in soil - will go some way to ensure markets have measurable and consistent metrics to create financial instruments to trade on global markets.
Growing demand
In Japan, institutional investors - particularly life insurance companies - are the driving force behind the surging demand for GSSS investments underpinning issuance.
In one key example, global food and agri-business Olam issued a privately-placed ¥5.5 billion ($US48.5 million) five-year sustainability linked bond in September 2021. ANZ was sole manager, swap dealer and sustainability structuring advisor.
This was the firm’s second sustainability-linked bond issuance following its debut in December 2020. It was the first SLB in Asia, excluding Japan. The private placement priced at an initial fixed coupon of 1.403 per cent with a step-down adjustment linked to sustainability performance targets relating to Olam’s purpose outcomes around supply chains in food and agriculture, the impact on communities and the environment.
While previously muted, investor demand in Japan for GSSS investments has grown considerably over the last few years on the back of directives from successive Prime Ministers. Former Japanese PM Shinzo Abe encouraged private sector ESG investments under his Growth Strategy ‘Abenomics’ back in 2013.
More recently last April, former PM Yoshihide Suga pledged to cut emissions by 46 per cent by 2030 which will likely boost both demand and supply for green assets. The country’s influential Ministry of Economy, Trade and Investment had earlier announced a roadmap for the transition to net zero. After unprecedented growth in 2021, this year will be a critical one for global markets. The post-COVID landscape is one of rapid technological change, a transformational shakeup of global trading orthodoxy and an increasing focus on sustainable business.
Sarah Ng is Director – Asia & Middle East Capital Markets, International, ANZ Institutional; Stephanie Vallance is Director – Sustainable Finance, International, ANZ Institutional; & Takehiro Yamamiya is Director – Rates & Credit Sales, Japan, ANZ Securities Japan Limited
This article was originally published on ANZ’s Institutional Insights website
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
10 Feb 2022
09 Feb 2022