Green Asia – not yet in bloom
While globally 47.6% of issuers and 61.4% of investors have an ESG strategy, in Asia, the equivalent figures are 15% and 21%, according to the report. Southeast Asia is even further behind China, say market participants, but this is slowly changing.
Mikkel Larsen, DBS
“The G, and to some extent the S, have been of greater focus in SE Asia when it comes to ESG, but there is now a greater appreciation of the environmental component,” explains Mikkel Larsen, chief sustainability officer at DBS.
“That has, in part, been driven by regulation, but also by a growing awareness that as a continent, Asia is expected to be one of the largest contributors to climate change, and be the most impacted by it.”
Green bond issuance from SE Asia has been slow, although it has picked up momentum in the second half of the year. In October, Thailand's Kasikornbank issued a $100 million sustainability bond. The IFC also issued a $130 million green bond to invest in climate projects in Indonesia.
Indonesia itself launched a $1.25 billion Islamic green bond back in February.
In October, the Association of southeast Asian nations’ Capital Markets Forum also introduced social-bond and sustainable-bond standards to help investors make informed decisions and reduce due diligence costs.
While this is a positive move to encourage ESG investments, says Larsen, there is still a long way to go in terms of creating suitable products for both investors and issuers in the region.
“The first phase in financing has mainly been green bonds, but now we need more alternatives – particularly for small and medium-sized enterprises, which are the locomotive of SE Asia,” he says. “We need financial solutions that can ease some of the burdens and cost of green financing. Securitization may be one such possibility, although it is not without challenges.”
DBS is looking at the potential for aggregating or securitizing green loans for smaller issuers.
Herry Cho, head of sustainable finance at ING in Asia Pacific, says there have been innovative deals for smaller companies for which a green bond is out of reach.
In January, ING led and structured two green bonds for a pure-play renewable energy SME, Sindicatum Renewables, by using a guarantee from an independent guarantee company –Guarantco, a private infrastructure development group company headquartered in London.
“It provided guarantees for the principle plus interest, which enabled the borrower to get an A1 Moody’s rating for its Indian rupee and Philippine peso green bond deals,” says Cho.
In total approximately $60 million was raised.
“These are the kinds of innovations we need to see more of,” she adds.
Cho also expects the green loan market to deepen in southeast Asia after the adoption of green loan principles that came into being in March this year.
Since then, ING has closed green loans for Macquarie Group from Australia, and Frasers Property in Singapore.
Herry Cho, ING
“We are confident we will see much more of these deals happening across the world, including in southeast Asia, across various sectors,” says Cho.
She says that greater efforts by banks in the region to incorporate ESG into all their discussions with issuers would be helpful.
“The region is obviously not as developed as Europe when it comes to sustainable financing, and not many banks in the region have teams dedicated to this area on the business opportunities side,” says Cho.
As banks start to feel their way in green finance in the region, they will have to ensure there is more than just a small department dedicated to sustainable finance, she says.
“To get sustainable finance moving faster, financial institutions will need to ensure that the entire organization is committed,” she says.
Cho also says greater and more tailored education for stakeholders is also needed. “We have to translate the language of climate change so that it is seen to be relevant to the specific companies we speak to, rather than just talking about it in broad strokes.”
Regulation will also help incentivize banks to be more engaged with corporates around their ESG strategies. The Indonesian government, for example, is requiring banks to provide a climate strategy by 2019.
“Whether banks will meet that requirement and what will be done with it remains to be seen, but it has made people sit up and listen,” says Larsen.
He says more products aimed at retail investors will help move the needle on ESG investing in the region.
“It’s not obvious that retail investors could be the game-changer we need, but they could be part of a solution. If nothing else, they send a signal that there is interest at the broader levels of society. For example, when consumers choose to no longer buy plastic bags, that change is felt immediately. Likewise, if consumers wanted their deposits to go into simple green exchange-traded funds or bonds – that would really see things start to change. The products need to be developed however.”
Larsen says he is expecting the emergence of more personalized products for the wealthy.
“The first step will likely be products linked to ESG indices, but then we will see tailored products aligned to a two-degree [change of average climate temperature] scenario. We’re not there yet, but it’s clearly where we are headed. We just need to speed that process up.”
Cho says investors will provide the impetus that companies need to start rounding out their sustainability strategies.
“We’re seeing private equity firms putting more ESG staff into Asia for one,” she says. “At the same time, institutional investors are increasingly turning to independent sustainability ratings as they put together their own ESG strategies.”
Such a move from investors would provide the impetus that companies need to start assessing their own ESG strategies.