Green is good

Green bonds and other socially responsible investments are beginning to take off in Asia, but domestic investors lag far behind their European counterparts.

The global capital markets are developing a taste for socially responsible investments. Issuers from the World Bank to French recycler Paprec have sold so-called Green bonds this year, taking advantage of growing demand from portfolio managers eager for their money to generate more than just returns.

Asia, notably India, has shown an interest, too. However, it begs the question, does the growing global enthusiasm mark a mindset change that can benefit the region?

Bindhu Lohani, ADB vice president for knowledge management and sustainable development, believes the approach to responsible investment has changed for both public and private-sector partners.

“The green agenda has become a priority for everyone,” he said. “In the early days, it was very difficult to allocate a certain amount of money for an agenda like the environment or climate change. Today, they like this. That’s a change in thinking that has happened over a period of time.”

The funds dedicated to climate-sensitive investments are certainly growing. Multilateral initiatives, such as the United Nations’ Green Climate Fund, are gathering pace and Scandinavia leads the way in dedicated portfolios. Pension funds in Denmark have asked their members to vote on the exclusion of fossil-fuel investments, while Norway’s sovereign wealth fund now blacklists the entire coal sector.

When it comes to Asia, however, not everyone is convinced.

Robert Binyon, a private-equity specialist chairing the impact advisory council for UOB’s Asia Impact Investment Fund I, sees “deep scepticism” over green investments in Asia.

“There was a moment 10 years ago, when everyone was jumping onto the renewable bandwagon and those investments failed,” said Binyon, speaking on the sidelines of Credit Suisse’s Asian Investment Conference in Hong Kong. “My sense is that institutional investors are still not convinced in the Asian space. That’s partly regulatory, as places like Germany have really pushed ahead in Europe.

“It’s beginning to change,” said Binyon. “We are seeing (interest from) some funds in Asia, but people, who are naturally investors here – and who don’t worry about political risk and so on – are still reluctant to get involved.”

Local demand

So far, European and US investors have dominated the green deals that have made it to the Asian capital markets, but there are signs that a regional investor base is beginning to develop.

Yes Bank, a private-sector Indian lender, launched India’s first Green bond in February, raising Rs10bn (US$160m) from a 10-year issue in the local rupee market. The issue was doubled from its initial target in a sign of the depth of domestic demand.

“There is definitely a real demand for sustainable and green investments in India,” said Jaideep Iyer, group president, financial management at Yes Bank. “Given the Government of India’s focus on India’s renewable energy potential and target of 175 gigawatts of additional capacity installation by 2022, it is estimated that the renewable energy sector will require significant financing.”

Yes Bank will use the proceeds to finance renewable energy projects, including solar, wind, biomass and hydroelectric. The bank has committed to finance 5 GW of renewable energy projects, according to Iyer.

The Asian Development Bank sold its first Green bond in March to raise US$500m. Over 30% of the notes were sold to Asian buyers.

Although there have been development themes in the bond markets previously – the ADB has sold clean energy and water bonds in the past – the Green bond format introduces a standardised global framework. In particular, issuers must clearly disclose the use of proceeds, with ongoing reporting requirements until maturity.

Global standards

Worldwide, the Green bond market took off in 2014 with US$35bn issued, triple the amount put out in 2013 (US$11bn), according to the Climate Bonds Initiative. The International Capital Markets Association provided a big boost in April 2014 when it launched a set of Green bond principles. The industry body hosted its first AGM on the subject in March 2015.

The format is at an early stage and many features remain under discussion. Multilaterals, such as the ADB, clearly have a role to play in promoting best practice, and discussions are under way to standardise Green bond reporting across the World Bank group and its affiliated institutions. In future issues, for instance, investors may learn how many tons of greenhouse gas emissions are saved from each project they finance.

“The Green bond market came to life through a combination of issuers, brokers and investors, and there was a desire on all sides to come up with some kind of framework,” said Pierre Van Peteghem, ADB treasurer. “As the market grows, investors’ demand for information will grow, as well.”

The additional accountability, however, dampens the appeal for issuers, since it means Green bo nds are a lot more onerous. For now, issuers like the ADB have to decide if the diversification is worth the effort.

“The process is a lot more demanding (…) and the cost is flat,” said Maria Lomotan, the ADB’s head of funding. “All our projects have environmental components, so we had to evaluate that versus what would be required to do this to see whether it would be feasible for the institution.”

That equation, however, may change in the future.

“I would not be surprised if, going forward, Green bonds would be more expensive (for investors),” said Van Peteghem. “It’s a question of supply and demand. Right now, supply is limited and demand is increasing. The product itself brings something more to investors, which is the Green component. So, I would not be surprised if we get some benefit.”

“When you do a green bond, it focuses the importance of allocating resources for certain types of projects and investments,” said Lohani. “The important thing is to associate these kind of bonds with very high-quality projects. Then, the investors’ confidence will grow.”

However, while socially responsible investing is taking off in Asia, the slump in oil prices is making it harder for renewable energy sources to compete with fossil fuels. That threatens to stall the advance of green projects, says AIIF’s Binyon.

“I think it (low oil price) could damage things very considerably. People’s tolerance for what is still relatively high-priced energy fluctuates depending on what they are paying anyway and, if oil prices are relatively cheap, people tend not to be looking so much at alternatives.”

Others disagree, arguing that the shift into clean-energy development is a longer-term trend that short-term price fluctuations will not affect.

Todd Freeland, who is leading a US$400m second funding round for the ADB-backed Asia Climate Partners fund, says environmental concerns are becoming entrenched in corporate strategy as infrastructure developers look to boost environmental reputations and make their investments more resilient to climate change.

Mitigation projects

“It is interesting to see some sponsors now looking at this not from an altruistic perspective, but as part of a sustainable investment strategy. They’re not doing it because it feels good, but because it mitigates risk,” said Freeland, director general of the ADB’s private sector operations department.

“Banks, too, are all hearing these demands. Some view it as an extra cost, but some see it as risk enhancement.”

Mitigation projects, which reduce emissions or environmental impact, are typically tied to cash flows from a new or existing asset and, as such, can be financed through traditional methods. Adaptation measures, meanwhile, are designed to protect investments or ecosystems and often do not generate the kind of returns that private sector investors require.

Here, however, the ADB has seen some progress. Akay Flavours & Aromatics, one of India’s biggest spice exporters, has received a US$16.5m investment to expand climate-resilient farming in India and Cambodia, using drip irrigation and harvested rainwater. Akay is also getting a US$5m loan to provide credit to farmers in Cambodia under the Climate Investment Funds’ Pilot Program for Climate Resilience. (See Box.)

“There is still a lot of work to be done around how adaptation or increased resilience can be an attractive business proposition,” said Michael Rattinger, climate finance specialist at the ADB.

“There is a shift away from the classic CSR approach to environment, and a growing awareness that this can be a threat to business.”

For Binyon, low oil prices give Asian policymakers an opportunity to address some of the distortions that have deterred private-sector investors from green energy projects.

“Subsidies have been a hugely distorting issue, which makes any private investor wonder at what point the market will really be allowed to work itself through,” he said.

The rapid growth of Green bonds offers an alternative source of financing for the projects that do go ahead, but the gap between short-term investment attitudes and long-term funding needs remains wide.

“There’s a challenge for the financial industry here to work out how we bridge that (long-term funding gap) in the next decade,” said Binyon. “The pool of capital may be big, but people’s attitudes are conservative.

“I think we’re five years away from when the huge capital that’s here really gets unlocked.”