The outlook for sustainable finance in Asia is favourable, according to BNP Paribas’ annual regional analysis. The region is the world’s second largest for green bond issuance and is expected to represent about 20% of global supply in 2024.
Asia and European markets continue to see sustainable financing momentum and supportive regulatory environments, despite global economic uncertainty.
Last year’s COP28 reaffirmed the bright prospects for clean energy sources, such as solar and wind, to become a mainstream part of the global energy mix. The build-up of renewable energy capacity will also need financing, highlighting the ongoing importance of sustainable finance – most notably green bonds.
Positive issuance trends
There was a rare pullback in global sustainable bond issuance in 2022, which was followed by a partial recovery in 2023, as a total of USD800 billion was issued – representing a year-on-year increase of 14%. In 2024, green bond issuance is projected to continue its upward trajectory with an expected USD580 billion of new bonds to be issued over the course of the year.
“It is very encouraging to see asset managers take a science-based approach towards sustainable financing instruments, as well as the willingness of issuers to realise their ESG commitments via financing activities that support their action plans,” says Chaoni Huang, Head of Sustainable Capital Markets, Global Markets APAC, BNP Paribas.
❝It is very encouraging to see asset managers take a science-based approach towards sustainable financing instruments, as well as the willingness of issuers to realise their ESG commitments via financing activities that support their action plans. ❞
Several markets in Asia have seen progress in this space. Hong Kong for example, recently announced plans to continue issuing green bonds and infrastructure bonds, a move that is set to further the city’s green credentials.
Sovereign, supranational and agency debt will continue to represent a large share of issuance going forwards. Over the next three years ESG bond maturities are set to lead to an upbeat issuance outlook, with USD507 billion of redemption forecast for 2025 and 2026.
“Maturities in the green bond market will increase significantly over the next three years creating a push/pull dynamic in the market, where corporates and governments look to roll over their green credit, and investors also look to allocate more capital to replenish maturing green bonds in their portfolios,” says Trevor Allen, Head of Sustainability Research, Markets 360, BNP Paribas.
❝ Maturities in the green bond market will increase significantly over the next three years creating a push/pull dynamic in the market, where corporates and governments look to roll over their green credit, and investors also look to allocate more capital to replenish maturing green bonds in their portfolios. ❞
In addition to ongoing strong momentum in the regional issuance of ESG bonds, meaningful progress is also expected in terms of the realisation of transition finance and the adoption of biodiversity as an asset class.
Transition finance take-up on the rise
Transition finance is an aspect of sustainability that is considered by many as a critical component to addressing climate change. It involves the use of investments to fund the decarbonisation of carbon intensive industries, such as steel and shipping – addressing not only the environmental impact, but also the social elements of decarbonisation, like increased unemployment.
Critics of transition finance say that it is a concept that has yet to be realised. But in 2024, we are already seeing developments in Asia that are making this kind of financing a reality.
For example, from a deal perspective, Japan has issued the first tranche of a landmark climate transition bond, worth JPY1.6 trillion (USD11 billion), this is an inaugural transition-labelled sovereign bond, with the funds directed in part to subsidies for green initiatives, as well as financing research – such as methods to reduce the carbon used in steelmaking.
There is also progress on the regulatory front in Asia. The Monetary Authority of Singapore recently launched the world’s first multi-sector transition taxonomy, which details the criteria for transition activities that contribute to climate change mitigation. Transition credits are an important part of Singapore’s transition efforts, and the central bank has already selected two coal power plants in the Philippines for an early phase out to test the efficacy of these instruments.
More globally, there is the recent publication of a major report by the ICMA: Transition Finance in the Debt Capital Markets, which is a deep dive into transition finance, covering everything from best practice to policy implications.
These developments indicate that transition finance will be a major sustainability theme throughout 2024, with Asia playing a key role.
Biodiversity – a rising asset class
In terms of biodiversity, investors typically consider how they can allocate capital to address the declining variety of lifeforms in the natural world. Investors are increasingly starting to consider it as a viable investment theme, and one that is particularly relevant in the current environment.
Timberland and forestry assets are typical biodiversity investments, and they fit into a growing trend towards alternative investments that are less liquid than traditional bonds and stocks.
“Biodiversity is in the right place at the right time, with forestry assets addressing the investment objectives of many investors. Robust reporting standards on biodiversity are crucial and the regulatory sentiment in Europe and APAC is very supportive in terms of driving enhanced transparency in this area,” says Xuan Sheng Ou Yong, Green Bonds & ESG Analyst, BNP Paribas Asset Management.
❝Biodiversity is in the right place at the right time, with forestry assets addressing the investment objectives of many investors. Robust reporting standards on biodiversity are crucial and the regulatory sentiment in Europe and APAC is very supportive in terms of driving enhanced transparency in this area. ❞
Investors can also engage in the biodiversity theme in public markets, by investing in business models that have nature-friendly processes in their value chain.
This includes nature-intensive companies that have ambitious biodiversity commitments, as well as companies offering solutions that reduce the pressures that harmful industries exert on nature – such as sustainable agriculture and materials, and companies that are part of the circular economy.
To conclude, the rise of biodiversity investments alongside progress in transition finance, show that the range of investable assets is broadening to capture the growing demand for ESG exposure. At the same time, the strong appetite in green bonds show that the market is deep enough to absorb large flows of capital. This combination of breadth and depth bodes well for sustainable finance in 2024, both in Asia and globally.
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