IFR Asia: Let us start things with an overview of ESG bond issuance trends across Asia-Pacific.
Sarah Ng, ANZ: The market has matured to some extent. We’re all familiar with the terms ‘sustainable financing’ and ‘ESG’ and all these wonderful acronyms by now.
From a granularity perspective, we are moving forward from green being the dominating colour into other social and sustainability formats. We are seeing carbon neutrality bonds, biodiversity bonds, even blue bonds for the benefit of marine ecosystems for example. On the social bond front, another colour that we’re hoping to introduce is orange bonds, for gender equality.
Aside from granularity, what’s also interesting is the fact that it’s much more of a normalised topic of discussion now. ESG is now one of the first things investors ask about in terms of risk factors. And issuers are coming to us on a voluntary basis to look further into sustainable financing.
IFR Asia: How about you Shailesh, what are you seeing?
Shailesh Venkatraman, MUFG: On volumes, what’s interesting is that the global split between the different categories and labels of bonds mirrors closely what we see here in Asia.
Green bonds make up roughly 60%; social and sustainable bonds are anywhere in the mid-teens and a very small percentage are sustainability-linked bonds.
The low volumes on SLBs probably has more to do with the constant ambiguity and subjectiveness around the ambitiousness of targets. Candidly, there are times in our conversations with issuers where we feel we’re better off dropping the label, rather than having a label, which in turn, becomes more of a distraction in the credit conversation with the investors.
Secondly, sometimes the wide flexibility in the use of proceeds of sustainability-linked bonds leaves it open to more questioning around, “Is it really additive to the green or the decarbonisation efforts?”
IFR ASIA: What are the challenges of investing in ESG across different Asian jurisdictions and what kind of taxonomies do you refer to?
Gabriel Wilson-Otto, Fidelity: There are three broad use cases where taxonomies, issuer characteristics or instrument characteristics are considered. The first is around fundamental risk assessment, so, “What are we actually learning about the issuers’ practices on material ESG risks and opportunities through the issue of an individual instrument or broader disclosure?” The second is where taxonomies really come into it, which is, “How can we classify activities, and how does this meet client demand for exposure to a specific topic or theme?”
Then the third is around regulatory reporting. Both locally, but especially internationally, there’s a huge range of increasingly prescriptive reporting and fund labelling requirements that asset managers need to adhere to. This can include a requirement for managers to report aggregated information on the issuers and instruments they own on behalf of clients. So, increasingly, we need the information for those three buckets.
There has been a huge proliferation in taxonomies and there’s often a lack of consistency around those taxonomies. For example, there is no global agreement or ‘one size fits all’ standard of what a ‘green’ activity is. Even when there is agreement, there can be challenges with direct comparability of taxonomy thresholds as the application of a scientific pathway towards net zero emissions will be industry, sector, and country dependent.
If we look back at China as a great example, the first version of the ‘Green Bond Catalogue’ had very significant differences to the definition of ‘green’ within the EU Taxonomy. Encouragingly those differences have now shrunk massively.
Similarly, if we look at some of the newer taxonomies, whether this is the ASEAN or the Singapore Asia taxonomy, they’ve been created with those international standards in mind. I wouldn’t expect one common standard to come out anytime soon, but the steps towards harmonisation are incredibly important for investors.
IFR Asia: Singapore has been at the forefront of developing taxonomies for ESG. Tze Kai can you talk a little about that?
Tze Khai Poh, MAS: We rolled out our taxonomy in December with detailed thresholds and criteria for defining green and transition activities.
We named the taxonomy a ‘Singapore-Asia taxonomy’ because we intended for the taxonomy to be used by our financial institutions that serve the region. In that sense, interoperability is something that is very critical to us.
Gabriel mentioned that the newer taxonomies are very much more aligned, but remain fragmented. The Chinese taxonomy and the EU taxonomy have gone through some interoperability, using the CGT – Common Ground Taxonomy – efforts.
Singapore is keen, or is, part of this CGT movement. We hope that our taxonomy can be part of the CGT, such that there will be more alignment with different taxonomies.
IFR Asia: Melissa, what are you seeing in terms of taxonomies across the rest of Asia?
Melissa Cheok, Sustainable Fitch: I think something that we are seeing that’s quite encouraging, particularly in this part of the world, is the efforts to address coal phase-out – pioneered in the ASEAN taxonomy.
With regards to the Singapore-Asia taxonomy (SAT), I’m not just saying this because the MAS is here, but we truly see it as the best taxonomy available currently to address transition. Looking at the number of sectors covered, and the very clear technical-screening criteria that apply to each of these sectors – it is a good first stepping stone towards addressing transition in a lot of the economies here. Also, the SAT addresses early coal phase-out very well, where it is treated as a separate kind of issue on its own.
It remains to be seen exactly how many will qualify for early coal phase-out funding, but that’s something that we’ll have to see as entities and corporates come up with their own entity-level transition frameworks and their transition strategy overall.
Something that I think we are also observing is the fact that there is a breakaway from just purely following what is in the EU taxonomy. I think that was an overdue development. We used to see a lot of companies just, kind of, copy and paste whatever was in the EU taxonomy, and say, “Oh, we’re aligned” and our analysts would say, “Nope that’s not even mentioned in the EU taxonomy.” So, there is a lot more nuance now, which is encouraging.
IFR Asia: What's the standard of ESG disclosure across Asian corporates?
Gabriel Wilson-Otto, Fidelity: Improvement is definitely the name of the game. A lot of that has been driven by good work from regulators at stock exchanges, in terms of setting minimum standards for disclosure and leadership from some local issuers. The challenge is that sometimes issuers have approached disclosure as a compliance exercise rather than a strategic exercise of engaging with the underlying topic. So, what we currently see, looking across the market, is a wide spectrum in quality of disclosure.
IFR Asia: Ian, you're guaranteeing bond issues, dealing with a lot of first-time issuers. What standard do you see in terms of disclosures there?
Ian Hay, CGIF: We see a huge variation from listed companies, to financial institutions and even private companies. It’s probably no surprise that some private companies are very early in their sustainability journey. But what we have found is that, if you speak to the right people – often the owner, the CEO – there is a desire to disclose information. They don’t want to be the laggards in the industry, so they do want to disclose data. They don’t always know how, but they are on that journey and are making steps.
IFR Asia: How do you follow up on how bond issuers have used their proceeds?
Ian Hay, CGIF: Quite tightly, actually. In the documentation, there will always be a number of conditions. We want to see that corrective action plans are put in place, that they are followed through, and that what has been agreed is actioned. We also undertake site visits.
During the first couple of years, this can be more intensive for some of our issuers – for example, those in construction. If there’s hard construction going on, we will visit them potentially every six months. For more vanilla corporate financing deals, we will probably relax that to once-a-year reporting.
If something goes wrong, or there is a regulatory incident, potentially an accident – something where ESG concerns are raised it could well be quarterly, and it would require much more oversight.
IFR Asia: How is that different at Bayfront, Bryan, because you are bundling these asset-backed securities and the assets are already identified from day one?
Bryan Woon, Bayfront: Bayfront is a unique company as we are both an issuer and an investor. We invest in infrastructure loans, and then we securitise those loans, issuing listed and rated securities to institutional investors, known as infrastructure ABS.
In our first deal, we didn’t have any dedicated sustainable tranches, but from the second deal we introduced one to cater to ESG-conscious investors. So we introduced a sustainable tranche in the form of the Class A1-SU notes, while all the other tranches were conventional. The unique part is that, compared to a green bond – a normal green corporate bond where you issue first, and then you take the proceeds, and have to allocate it to eligible assets – in our case the assets are already there from day one because we’ve pre-selected a pool of sustainable assets.
They are eligible green or social assets in line with International Capital Market Association principles. They’re already fully invested from day one, so it’s already 100% allocated. Having said that, it doesn’t mean that we stop monitoring the projects and allocation of proceeds. We still continue to monitor each and every project within the portfolio, as part of our day-to-day management of all the collateral. That goes through our own internal ESG framework, as well. We also monitor and report the running balances of all the sustainable assets vis-à-vis the running balance of the sustainable tranche.
For us, as an issuer, we have to keep in mind what investors would like in terms of different kinds of taxonomies and frameworks.
Our securities are currently sold in the Reg S market, not in the 144A market, but our investors span across Asia, Europe, and the Middle East, so we built our framework to be aligned with ICMA principles.
Our framework is reviewed annually and comes with a second-party opinion and so we do follow the green and social standards very closely. Every time it’s updated, we update our framework and see which assets still qualify as green, or not.
IFR Asia: It’s a lot of work updating frameworks. Melissa, what would you say is the general standard of bond frameworks across Asia?
Melissa Cheok, Sustainable Fitch: I wish I had nicer things to say. I think it really varies. We’ve analysed the use of proceeds – exactly where those are going and the impact those have. Unfortunately, we’ve found the greatest variance in the energy-efficiency use of proceeds (UOPs), so that can really vary in terms of quality and the exact end use.
For example, we’ve seen a lot of oil and gas companies say that they are using their UOPs to increase or improve energy efficiency, but ultimately, your main end product isn’t necessarily the greenest product, so how material are these developments?
We recently came across a manufacturer of auto parts that issued a green bond. But their manufacturing process was left exactly the same, there were no indications that they intended to use the financing to implement more sustainable practices across their internal operations. Instead, they said they were issuing a green bond to enable them to manufacture more of the same auto parts, just that they intended to sell these specifically to EV companies. That’s not technically a green activity.
These are some of the variances you see.
IFR Asia: Tze Khai, Singapore has now issued green bonds three times, so what was behind this decision?
Tze Khai Poh, MAS: It was certainly not because it was the flavour of the year because it’s a long-term commitment for us. We had to go through quite a bit of legislative changes in order to make that happen.
Essentially, before we passed the new legislation, government securities were issued for development purposes, which means we used it to provide a robust, risk-free yield curve for the corporate market to take reference. For green bonds, the proceeds cannot be spent, it has to be invested. One particular criterion is that the life of the project that we fund out of the green bonds must have a shelf life of at least 50 years. So, it’s meant to be for significant intergenerational infrastructure – such as coastal protection, longer-termed transport improvements in our rail systems. As it stands, we have a target of S$35bn (US$26bn) of issuances by 2030 – so far, we are on track.
IFR Asia: Bryan, what were the considerations for Bayfront using the ‘sustainable’ label on the ABS?
Bryan Woon, Bayfront: I will first start by saying it’s not with the intention to get a greenium. But we definitely wanted to crowd in as many investors as we could. We decided to be pioneers as there are not that many green securitisations out there in the world. Since there are plenty of green corporate and green sovereign bonds, we thought, ‘Why not introduce it in securitisation?’ So, we decided to take the step in 2021 and we’ve successfully replicated the sustainable tranche ever since.
We always get the question, “Why can’t you do a fully sustainable or fully green securitisation?” Unfortunately, the state of the infrastructure debt market, particularly in Asia-Pacific, is not there yet. A lot of these renewable energy projects are concentrated in very few markets, like India, Indonesia, the Philippines and Australia.
The nature of any securitisation transaction is that diversification is critical. So, if we were to exclude all the non-green assets, that just increases the concentration risk within the portfolio.
IFR Asia: When does CGIF decide when to use ESG labels on guaranteed bonds?
Ian Hay, CGIF: Throughout the transaction we always make sure that the deal is fully compliant with the Asian Development Bank’s safeguards principles, which covers the ‘E’ and the ‘S’, and also ADB’s integrity principles, which covers a lot of the ‘G’. So, it’s embedded into our whole decision-making process from start to finish.
IFR Asia: So Bayfront has said they’re not just doing this to get a greenium, but is there a greenium? Tze Kai, have you seen that in issues?
Tze Khai Poh, MAS: We’ve done three issuances so far, so it’s a bit early for us to have the kind of data or robust analysis to be able to determine whether there’s a greenium or not.
Shailesh Venkatraman, MUFG: In Asia, similar to the trends we see in US and Europe, the greeniums are prevalent but compressed.
One point we make often to issuers about greeniums is the spread compression in investment-grade paper, which has really been significant in the last 12 to 18 months.
So, when we’ve had that level of spread compression in investment-grade paper, it’s harder for the greeniums to really stand out. But they do exist, sometimes low to mid-single digits – but it’s very hard to generalise.
IFR Asia: I think it's clearer for Bayfront because you issued two tranches. One is green and one is not sustainable, with pretty much similar attributes.
Bryan Woon, Bayfront: The greenium is undisputed for everyone to see. To us, the most senior AAA rated tranche made sense to be the sustainable tranche – it’s also the thickest. Then we bifurcated this tranche into a sustainable and conventional one. Credit wise, they are pari passu with identical features.
Unlike corporates or sovereigns issuing green bonds, there’s always a bit of subjectivity on the size of the greenium based on what’s your pricing source for the secondary spreads at the time. In our case, it was all within one primary market issuance.
Our greenium has ranged between five to seven-and-a-half basis points, depending on the oversubscription. The range of oversubscription for the conventional tranche has been between, on average, like 1.1 to 1.2 times covered. Then, for the sustainable tranche, it’s easily two times covered.
IFR Asia: From the buyside perspective, are you looking at ESG deals in terms of greeniums? Is that the right way to look at it, or are you looking at it in some other positive way?
Eric Nietsch, Manulife: I think there’s probably too much of a focus on it.
Everybody always wants to know who gets paid for going green. Is it the companies? Is it investors? How do you manage and approach this trade-off?
The reality is there’s not that much of a trade-off. We did a research project with Master’s students from Singapore Management University, and we looked at the greenium in different markets, and different ways to measure it. There is a greenium, and it’s usually the companies that benefit a little bit, but at the end of the day we’re talking about a fixed-income issuance with the same underlying credit quality. That’s why I say that the trade-off is not that big.
You could argue that the companies benefit from a greenium a bit, but there is a cost to going through the process of issuing a green bond and setting up the framework. So, when we talk to companies who haven’t issued a green bond, they’re often very concerned about, “Will I get a greenium?” What we find, after they go through this process, is there are all sorts of other co-benefits that are probably more important than the greenium.
Bayfront mentioned bringing in a different group of investors, maybe a wider investment base. Those investors are probably more concerned with sustainability, which means they’re probably more longer-term oriented, maybe more real money, more stable providers of capital.
Companies usually find that all of those reasons make it very worthwhile to go through this process completely separate from the greenium.
From our perspective, we see a lot of benefit also. Bringing in that wider investor base reduces the refinancing risk. It’s in the hands of more stable capital, which also means that the volatility is lower. So, the greenium is, kind of, about the return, but the risk and the volatility is, arguably, improved. So, from a risk return profile, there’s benefit.
Ultimately, if all of these things are reducing environmental and social risk in a business, and improving the refinancing risk, all of those things are going to support better default risk. That’s really what is probably the most important.
IFR Asia: Melissa, is there a link between higher ESG standards at issuers and their credit quality? If they have a good ESG-reporting process and high standards, does that translate to better credit quality?
Melissa Cheok, Sustainable Fitch: Obviously, ESG factors can affect financial risk, which can sort of impact on credit quality, depending on how big those risk factors are. That’s probably why the UN Principles for Responsible Investment encourages companies to take into account ESG risk, but, unfortunately, the answer is not as straightforward.
Naturally, if you’re an investment-grade company, your reporting would probably be a lot higher, purely as a function of your size. You have the resources at your disposal. Also, if you’re an equity listing, you have to abide by certain ESG disclosures.
But then there are also companies where it has been proven, in some cases, that greater ESG disclosures are not necessarily always financially beneficial for them.
There was a recent report that came out from National University of Singapore about palm oil companies that concluded that reporting on their supply chains, human labour and so on was not necessarily advantageous for them in terms of raising capital.
That can just be because of the perceived financial risks of the downsides of those ESG risks that get posed to them. Hopefully, over time, we’ll see a better link when the quality of the reporting goes up, with more data points, more technical screening criteria (TSC) that are set out with regard to the taxonomies and the frameworks that certain companies abide by. But, for now, it doesn’t really look to be the case.
IFR Asia: Sarah, how much work is the buyside putting in? How is the investor base for ESG developing in Asia?
Sarah Ng, ANZ: What we’re seeing now is that investors that would not have previously thought of ESG as a product and asset class are beginning to focus on it, and taking that next step from mere awareness of ESG as an investment risk factor.
As an example Chinese bank GSS issuance, now stands at around US$130bn from the last two or so years. Around US$30bn of that is in international currencies.
The funding that has been raised by these Chinese banks will have to be deployed onwards into ESG use of proceeds. There’s obviously a fungibility to it as well with these bond proceeds being redeployed back into the system as underlying assets mature. As such, we are seeing a snowball effect from this cumulative growth in the market, which has seen the impetus for Asian ESG bank issuers to become ESG investors as well.
We are now being approached by some of the Chinese investors, not just the Big Four but regional banks as well, eager to learn how to invest in the asset class. We are also seeing the fruits of regulatory drivers as well. For example, Taiwanese banks increasingly have green specific portfolios, with the gentle encouragement of the regulators there.
IFR Asia: Shailesh, from your experience, what kind of ESG questions are investors asking?
Shailesh Venkatraman, MUFG: At MUFG we analysed the kinds of questions investors ask generally on roadshows from an ESG perspective and they can be broken in four most prominent categories. The first one is more around the issuer’s strategy, action plans, targets, questions like, “What’s the basis on which these targets have been derived? Whether they are science based and what additional initiatives are you as an issuer taking towards the move to carbon neutrality?”
The second one is around the use of proceeds. This has been a very clear ask, from investors, that there be more specificity on the use of proceeds and covering this in general terms is just not enough. If we are talking about eligible assets or eligible investments, a little more granularity is needed.
The third category is ESG reporting. Post-deal reporting is something that many investors have talked about, asking whether we will see the issuer a year from now talking about the impact of their ESG investments, and whether this is verified by any appropriately qualified third parties.
Lastly, the fourth bucket is around the frequency of ESG labelled issuances – "ls this more a one-off issuance, or is there a programme or a plan that every subsequent issuance will carry a label of some sort?” Issuers may have to articulate whether or not their funding plan will follow a particular ESG strategy going forward.
While issuers may choose to keep or drop an ESG label from any issuance, for various different reasons, that doesn’t take away from the fact that "every financing discussion today, by definition, will bring up ESG related questions whether or not you attach a label to it." A lot of our conversation on the panel today has been about labelled issuances, but I think ESG goes way beyond that and investors have specific questions on ESG strategy of a company that is independent of the ESG label / tag assigned to any financing.
IFR Asia: Bryan, are the questions different for securitisations?
Bryan Woon, Bayfront: Yes, we get two broad sets of questions. One is on a fundamental basis, “How do we look at ESG as an institution and the kind of ESG screening process we do?”
Then, specifically, in terms of the securitisation we receive questions like, “How does it work to have one sustainable tranche within a general securitisation and how does the credit risk passed through to investors?”
“If I invest in a sustainable tranche and if the first asset to default is a sustainable asset, does it mean I’m the first one to absorb the losses?” The answer is, ‘no’ because it still follows the creditor-loss hierarchy, where the equity tranche, the first loss piece, which is retained by Bayfront, is the first one to absorb losses, regardless if the project is a conventional asset or a sustainable asset.
Then questions also arise about, “What gives this tranche the label that it deserves?” Under ICMA guidance, our bond is labelled a ‘secured standard bond’, where you just have one tranche financing part of the pool, even though the pool has a mix of both conventional and sustainable assets. So, you are exposed to the credit risks of both conventional and sustainable assets, but how you get confidence that this deserves the label is through allocation of the use of proceeds.
So, in designing the sustainable tranches we first look at, “What’s the pool of sustainable assets in the entire collateral pool?” and then we incorporate a buffer. Let’s say we put in a 20% or 30% buffer and then we decide, “Okay, that’s going to be the size of the tranche.”
The need for the buffer means that, in case of any events like a prepayment or a default, the investors in this tranche will still have the confidence and assurance that every dollar they put in is invested in a sustainable asset.
IFR Asia: The sustainability-linked bond market has gone a bit quiet in Asia since about March last year, when the EU’s new standards came in. Sarah are issuers rethinking the SLB structure?
Sarah Ng, ANZ: I think I’d like to argue that we’re getting to a point where all issuances, whether conventional or sustainability-linked, are actually SLBs, in a way, because we have this increased scrutiny from investors on an issuer’s corporate sustainability targets as the base case for investment.
I think we have also naturally moved from SLBs as simply articulating a corporate’s high-level sustainability targets such as net zero 2030/2050, and now addressing goals such as additionality, materiality, ambition.
We are also coming to two key turning points in the market. The first SLBs in the region were issued at the start of 2021 – as such, we are coming to the sustainability target observation dates where the coupon step-ups could be triggered for a lot of these issuances. We’re also getting closer to the 2030 1.5-degree targets that will be closely measured by investors, as well. I think there’s definitely a bit of a, “Let’s take stock and see how we, as a corporate, deal with these challenges,” before they really put themselves up to additional investor scrutiny that comes to linking sustainability targets to their financing.
IFR Asia: What about SLBs from an issuer’s standpoint?
Bryan Woon, Bayfront: What I’m about to say is more of a personal view given Bayfront has not issued an SLB. But I feel, in a way, it’s a zero-sum game. Fail to meet the KPIs, and I as an issuer lose some money by paying the step-up coupon to you, the investor. I’ve failed to meet my targets, and having positioned to your investment committee that you should invest in this, it also makes it difficult for you to justify this investment and any future investments.
I don’t think a few basis points, whether that’s 15, 20 basis points, is enough to really cover the “losses”, both as an issuer as well as an investor. I think the bigger punishment for an issuer is an investor putting you on your blacklist because you’ve missed your KPIs for one issuance. So, why should they come again in your next issuance?
I think that’s enough of a punishment or disincentive.
IFR Asia: From the buyside perspective, how do you look at UOPs? Is there any way you prefer them to be structured?
Eric Nietsch, Manulife: First, actually, let me just take a step back and talk about how we assess labelled debt in general. To us, there’s a certain level of a false distinction between use of proceeds and general corporate purposes that are sustainability-linked.
What we’re looking for, really, is that the issuer has a strong sustainability strategy and that this is feeding into how they’re funding the debt. So, from a use-of-proceeds perspective, we’re not interested if they’re merely funding green projects in order to alleviate the balance sheet to also expand high-emitting activity.
On the SLB side, to Sarah’s point, we’re really looking for materiality and additionality. We’ve certainly seen a number of dodgy structures and targets in the SLB market that we didn’t feel were material or ambitious.
I think it’s a shame that this had damaged credibility and as a result, the market has stopped growing in the way that it used to. Are we at this inflection point or turning point where the market will begin to grow and come back with more ambition and more credibility? Maybe it’s too early to say, but I think we would encourage that.
Frankly, I think, whether it’s use of proceeds or sustainability-linked, we need all the tools that we can get.
IFR Asia: In Japan, we've had transition bonds becoming pretty popular. Shailesh, do you see there's a place for transition bonds in the rest of Asia?
Shailesh Venkatraman, MUFG: Japan has indeed taken the lead in the area of transition finance. The Japanese government sold the first ever country-labelled transition bond. From a Japanese sovereign point of view, issuance is expected to be around ¥20trn over the next decade, which is pretty significant.
There have already been quite a few issuances in this format by the sovereign. Interestingly also, a number of corporates have issued JPY SLBs in the domestic market. Japan Airlines was the first airline company to issue in that format; Kyushu Electric, where the proceeds were going to help fund safety measures for their nuclear power operations – these are just some of the examples of transition finance in the Japanese domestic market.
I think some of the stigma associated with that label elsewhere in Asian needs to fall away, and that will require globally accepted standards building upon existing frameworks such as the Climate Transition Finance Handbook.
If we can show to issuers that adding such a transition finance label will open up pools of liquidity, in a format and in a methodology which is internationally accepted and in compliance with ICMA and other standards that have been set up, I think that will be a game changer. MUFG is committed to playing an active role in developing the transition finance market for issuers in Asia leveraging on our experience from Japan.
IFR Asia: From a buyside perspective, what are your considerations for investing in transition finance?
Gabriel Wilson-Otto, Fidelity: We’re seeing improvement on the international frameworks to support this. For the first time, we’re starting to see product-labelling regimes have an improvers or transition category. Historically, they weren’t included in product labels.
For Asia Pacific, it’s critical. Transition is the name of the game here. It’s not necessarily possible, in a lot of sectors, to jump straight to best in class in one generation of enhancement. You need to think about the pathway to get there.
The complexity for investors is that because transition is context specific, it means you need to do analysis on every single asset in order to get to identify issuers that meet an appropriate standard for transition. For example, an asset in Indonesia could be labelled ‘transition’, whereas it would not be considered so in Australia or Germany.
When classifying issuers and considering transition, there’s also a question as to whether the transition is absolute or relative. For example, do you need to reduce 100 million tonnes of carbon to meet a minimum standard, or is the fact that you’re 20% better than the other players in the market already enough to count you as a transitioning asset?
In terms of establishing a framework for transition finance, what is happening in Japan is incredibly encouraging. The creation of a national pathway and plan that investors and issuers can consider progress against helps create arm’s-length and common assessment criteria.
Similarly, what we’ve seen within the Singapore and ASEAN taxonomies, as well as within – apologies in advance for the acronyms – the ESMA (European Securities and Markets Authority) naming conventions in Europe, as well as SDR (Sustainability Disclosure Requirements) in the UK, is starting to give investors cover around creating funds with arm’s-length classification that they can reference.
So, I think we’ll move from transition funding being a rounding error in the current bond issuance space, to something that’s more material, but it does require a higher level of due diligence. It is very dependent on standardisation and frameworks to drive critical mass.
IFR Asia: Looking at market development, Tze Khai, how have MAS’s various green incentives helped develop the market?
Tze Khai Poh, MAS: At the start, we were looking at the risks that climate change poses to the financial sector. We were focused on bolstering financial-sector resilience to this.
However, as we learned more, we realised that finance is the enabler for the transition to the sustainable investments so, it’s not just about the risks. it’s also about the opportunity of finance as the enabler. Then we expanded our scope.
At that point we started a couple of things, specifically our grant incentives, such as the Sustainable Bond Grant Scheme, where we subsidise issuers for the costs they incur in external review fees.
We have made enhancements over the years to include taxonomy costs and transition bonds.
IFR Asia: What kind of ESG instruments would you like to see more of?
Eric Nietsch, Manulife: In many ways, the green bond market has grown beautifully over the last decade, but we always welcome innovative instruments that achieve different things.
Social bonds are one area where we would welcome more issuance. There are often challenges with project size supporting pure-play, social bonds, so these sometimes get combined with green projects in sustainability bonds. However, more standalone social bonds would be useful.
I also think it’s really important to grow the transition bond market so that we’re not just meeting incremental energy demand with low-carbon options, but that we’re actually transitioning the existing stock of corporate assets.
Green bonds have always been able to include water, and waste, and nature more broadly, but there’s a huge market shift towards looking at natural systems more holistically. That brings in other interesting instruments that we’re seeing with debt-for-nature swaps, which are quickly turning into debt for all sorts of swaps: debt for humanitarian, debt for social. So, I think all of these developments are really useful and we welcome the variety and innovation.
IFR Asia: Who should be driving the development of ESG finance? Should it be regulators, governments, financial institutions, or whom?
Ian Hay, CGIF: In 2012, I was in the Philippines and we were discussing ESG risk amongst the banks. The Philippine bankers were asked, “who should be doing this?” I was shocked by their answer as the banks said they wanted more regulation. It’s the only time I’ve been in a room with bankers where they’ve said that.
Regulation is useful as it sets the bar – it makes sure things are going in the right direction. But regulation alone is not sufficient. At the other end, personally, I think the investors and the banks really need to play a significant part in this, because they’re the ones that are driving the flow of cash and investments. This is really what’s going to drive change.
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