A few years ago, environmental, social and governance (ESG) financing used to be the exception – now it is the norm.
Where the debate used to center on inchoate definitions of what is green or not, the market has now matured with improved ESG disclosures and increased scrutiny around structures.
Simply articulating corporate sustainability targets for 2030 or 2050 does not suffice anymore. The conversation is at a more granular level focusing on additionality, materiality and ambition.
The need for a more standardised approach has grown as taxonomies have proliferated. Hong Kong published its taxonomy for sustainable finance in May 2024, five months after Singapore. As expected, each country’s priority is to tie their taxonomy to their country’s underlying economy, but interoperability and alignment are key.
Green bonds make up roughly 60% of ESG note issuance in Asia Pacific, social and sustainable bonds somewhere in the mid-teens, with sustainability-linked bonds (SLBs) making up a very small percentage.
SLBs have declined in popularity after investors questioned whether the first wave of issuers had set genuinely ambitious and meaningful targets. However, some lenders argue that the instrument may be at an inflection point. In Europe, the failure of Italian utility Enel to achieve its key performance indicators at the measurement date, the first time this had happened in this kind of instrument, showed that some SLB targets were genuinely ambitious.
Within Asia Pacific, transition finance is an inescapable topic. Japan sold the world’s first sovereign climate transition bonds in February and dozens of Japanese corporate issuers have sold similar instruments.This could prove to be an inspiration for other Asian countries that need to fund their climate transitions without hamstringing their economies.
No discussion about ESG financing would be complete without mentioning greeniums. One of the perennial questions is who ultimately benefits from going green? For some market participants with only a few issues under their belt, it may be too early to determine whether greeniums exist. For others, the greenium conversation is overblown and detracts from the wider benefits of reducing environmental and social risks, which tends to go hand in hand with better credit quality.
Looking ahead, ESG financing is moving away from its original green hue. Blue bonds are now being issued for the benefit of marine ecosystems and orange bonds are being touted to support gender equality.
Such variety and innovation is welcome as the region’s economies need all the help they can get in attracting capital for ESG initiatives. While the market may not be at a stage where the “ESG” moniker can be dropped altogether because all financing is ESG by default, that is the direction of travel.
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