LSEG LPC: Is there a possibility for a common taxonomy standard for Asia Pacific as a whole, or is it too much of a challenge?
Stella Saris Chow, ANZ: Taxonomies have been drafted with interoperability and alignment in mind, which helps bankers a lot. But I don’t think a common taxonomy regime across Asia Pacific is a requirement.
I do see the need for regionalisation, tied to each countries’ underlying economies and goals. Taking Australia as an example, you see a focus on green minerals, metals and mining, which is relevant to the underlying economy. In Asia, transition is more prevalent, which is why transition activities have been defined in the Singapore-Asia and Hong Kong taxonomies.
Colin Chen, MUFG: I think we could argue for a global taxonomy, but the book would be so thick because you would have to include every single item which is important for everybody. A mining taxonomy in Singapore would be irrelevant – that’s why individual countries have their different emphasis. But interoperability is key.
LSEG LPC: If you want to drive more ESG financings, and taxonomies are important, in whose court does the ball lie?
Atul Jhavar, Barclays: For those of us involved in domestic markets, the value of domestic taxonomies is fairly straightforward. In theory, it should help spur domestic bond and loan markets in sectors that are relevant for that country.
The more difficult question is how you scale this up at an international level.
ICMA’s green bond standards help but I think there’s a role for both regulators and financial institutions. For an international transaction, perhaps it is more likely that a taxonomy from a more international financial centre, like Singapore or Hong Kong, be used.
At Barclays, we published a transition finance framework to provide transparency to our stakeholders. A few other banks have also started doing this.
While recognising there are going to be differences between various banks’ transition frameworks, I think there’s a possibility that you start seeing test cases of transactions that are internationally distributed. Perhaps one bank or a group of banks takes the lead in terms of defining it as transition, providing transparency about why we think that’s the case, and hopefully get enough critical mass of investors to buy it.
The guiding principles in the ICMA ‘Transition Finance Handbook’ are helpful to frame the topic but at the end of the day it’s not clear exactly which assets are going to be accepted as transition. Investors will have different views about it, so I think you have to get the ball rolling with a few test transactions, in sectors that are hard to abate.
We’ve started enough discussions with our corporate clients across the region now, where perhaps, initially, the obvious thing to do would have been an SLB. But now we’re talking about potentially doing a transition label, based on what we consider to be valid targets. So, hopefully, that will continue in the coming 12 to 24 months.
LSEG LPC: Investors in the loan market are primarily banks, so should central banks be driving this conversation?
Martijn Hoogerwerf, ING: Let me take a step back in terms of green, sustainable and transition taxonomies. In my view, green taxonomies are globally accepted. We still need some adaptation, but certainly, when we structure a green loan, we look at what has been done globally and with other taxonomies.
As a European bank, we will look at the EU taxonomy however it is not the main driver for labelling a particular loan, or the underlying asset, as green. Broadly speaking, the financial markets have accepted what can be classified as green and non-green. There are a few sectors and subsectors where we need better definitions, for example in the case of green minerals.
Looking at transition, what we really need is to localise and regionalise, and perhaps look at it through a sector lens as well.
The example I would like to share is in relation to hybrid vehicles in Indonesia. That is obviously a great transition asset. However, in Norway, that is not considered transitioning because Norway already has 90% EVs. A localised transition taxonomy is fundamental, and I think regulators have a very big role to play there.
LSEG LPC: In terms of labelled transition finance, the controversial topic is lending to hard-to-abate sectors. What are your thoughts on that?
Stella Saris Chow, ANZ: The key is having a credible transition plan.
In some ways, these industries and corporates can have a real impact in decarbonising their businesses. It’s not just about having a decarbonisation plan – a credible sustainability plan and setting a net-zero target by 2050 – it’s also about having an intermediate plan which is realistic and a plan on how you’re going to achieve that.
There are discussions on the need to finance the brown to green, especially in this region. This is where labelled transition financing could play a real role.
Coming back to what ICMA has done with the ‘Transition Handbook’, there’s a lot of discussion in the loan market – and I sit as the co-chair of the Green and Sustainability Loan Committee for the Asia Pacific Loan Market Association – around having a labelled transition loan product and what that would look like. A taskforce has been set up, amongst all the other taskforces, so we have something credible and standardised.
Martijn Hoogerwerf, ING: Today’s sustainable finance market is worth US$1.3trn with hard-to-abate sectors making up a tiny fraction. That’s an issue. We need to come up with a solution to channel capital towards companies that are hard to abate and help them transition.
Colin Chen, MUFG: It’s clear, especially in Asia, that the majority of reliable power assets are coal. It’s responsible for the majority of the carbon footprint that we have.
If you say, “The moment you have that four-letter word in it, you just cannot touch it,” we will never resolve the carbon footprint question. The key is having the standards for the targets that you want to achieve.
China and Japan both have frameworks for transition allowing them to have a number of labelled transition issues. This needs to be resolved in the rest of Asia for there to be more transactions.
LSEG LPC: Talking about China, on the bond side we see a lot of issuance in ESG instruments, but in loans there isn't as much. How would you explain that?
Atul Jhavar, Barclays: If you look at the overall sustainability-linked loan (SLL) market, it’s obviously in different phases of acceptance and development, in different parts of the world.
The US is probably in a state of flux, due to the significant amount of regulatory uncertainty, and some meaningful corporate and investor pushback on ESG in general. In Asia, the trend is very much broad acceptance of sustainability-linked labels, with SLLs being part of that.
I would imagine, across the market, discussions about new loans are increasingly about whether new issuances can be a SLL or not.
We’ve seen that in our European business, where we’re a much larger commercial lender and I think that will increasingly happen in Asia, as well.
The SLL market, to some extent, is less transparent than the bond market. So, I don’t think you get the full picture with public data and just looking at broadly syndicated deals.
Colin Chen, MUFG: Being a large, commercial lender, a lot of our discussions are predicated on the fact of whether one can do a SLL or not. Then it comes down to pricing.
If you look to the Americas, there’s a lot of corporate questions about, “Why are we doing this? Does it make a difference?” There’s a lot more acceptance in Asia that it does make a difference. How much of a difference it makes, that’s debatable.
We see a lot more acceptance and it’s not only in terms of the “E” part, but it’s also on the ‘S’ part of it. So, we’ve seen social and sustainable loans increase in interest.
Over the last couple of years, the team has done two very large social loans, both out of India, for social housing. They started off, saying, “We’ll just do a normal loan,” and there was a lot of discussion on why they should do that particular transaction but the advantage was clear.
Martijn Hoogerwerf, ING: In your credit-approval process, how does the credit committee look at whether it’s a sustainable finance transaction or not? Is it looked upon favourably or non-favourably?
Colin Chen, MUFG: Obviously, anything with the word ‘sustainable’ is looked on favourably, but the main criteria is always credit. For the broad ESG criteria, the question is “Does that improve the company’s risk because it’s more sustainable?”
LSEG LPC: Has any borrower met or not met the KPIs for transactions, whereby the incentive or penalty has kicked in?
Stella Saris Chow, ANZ: I think there’s a little bit of a difference across the markets that we operate in. Certainly when we set the KPIs, it’s always with the view of being material and ambitious. We want to see stretched targets and borrowers working towards sustainability outperformance.
KPIs on sustainability-linked loans see quite a lot of customisation, unlike a use-of-proceeds loan, where it’s very clear and consistent where that money goes.
That’s the beauty of the product. That proceeds can be used for general corporate purposes; however the targets can be tailored to be meaningful to the borrower’s sustainability strategy. So, if you’re an agricultural company, for example, this could be regarding water and waste or traceability of product. If you’re a power-generation company, you can tie targets to reducing emissions and higher proportion of renewable-energy generation.
When I started working on these transactions in Asia five years ago, the market was very positive, and there was less rigour to the structures. We are starting to see a lot more scrutiny around the structures and a more standardised approach. Over time, sustainability targets have been increasingly tied to tighter sectoral pathways, that are science-based targets, or some other sort of decarbonisation plan.
For financial institutions, some are Glasgow Financial Alliance for Net Zero members, however outside of Australia and Japan, many regional banks are reporting Scope 1 and 2 emissions, but not Scope 3. So, part of it is an evolution to start reporting on Scope 3, then be in a position in the future to have targets in place.
There’s also an increasing focus on standardisation of documentation. So, a lot of the work that we do at the APLMA Green and Sustainable Loan Committee is around updating the sustainable financing term sheets for SLLs, making sure that, there is some sort of template.
While it’s not always a requirement to have pre-issuance third-party review, it is important for the market development to bring standardisation to these transactions as well.
LSEG LPC: Does that bode well for SLL issuance in Asia compared to Europe and the US, where the trend is the other way around?
Stella Saris Chow, ANZ: I’ve seen some SLLs in Europe refinance in vanilla format. I think there are a number of contributing factors including potential for greenhushing and scrutiny around corporates and their sustainability strategies. We’re at an inflection point, questions such as “What are the targets taking you out to 2030? Can you, with confidence, say that you’re going to be meeting the halving of emissions required by that time?” are being asked.
So, I think that has taken a little bit of the steam out of the market in Europe. In Asia the engagement we’ve had with our customers continues to be very strong, including some borrowers, that are looking at only having sustainable debt as their financing.
Martijn Hoogerwerf, ING: That’s also what we see. But according to the data, if you look at the sustainability-linked market in Asia-Pacific, volumes have gone down quite rapidly over the last two to three years. From an ING perspective, we see continued and robust demand.
It does take more time now to structure a credible transaction. If we go into an SLL structuring process as a sustainability coordinator, it can take up to six, nine, 12 months of weekly calls with a client. This encompasses defining credible KPIs along with the alignment with the various pathways and ensuring we are setting ambitious enough targets.
Anecdotally, perhaps, I’ve never seen a client come to me where I suggest certain targets and they tell me that it’s not sufficiently ambitious. So, clients do see this as part of the negotiation process and want to ensure the targets are achievable.
LSEG LPC: 2030 is a big year for many participants, and next year could be a crucial year, given that loans typically have a sweet spot of three to five years. Do you expect to see a huge boom in ESG financings because of this?
Colin Chen, MUFG: The three- to five-year horizon on most transactions is related to these being corporate transactions rather than being ESG-related. There are a significant number of them coming up and I imagine that pricing will be an issue. You can’t escape that, but the difference between an ESG and non-ESG deal is shrinking. The little difference perhaps doesn’t overcome the additional cost of doing it. But I would argue, that the additional requirements such as frameworks and ESG are all things that one would do anyway.
We have had some requests for normal loans being turned into SLLs, so this is becoming quite – I wouldn’t say “common,” but it’s coming up, but I have not had any requests of turning it the other way yet.
Atul Jhavar, Barclays: I don’t think 2025 will be a particular inflection point. Yes, a lot more borrowers have a 2030 target compared to three or five years ago but in the private loan market, there will be some interim targets.
I do think there’s a bit of a tension in the market because banks, have set up much more stringent governance mechanisms now, compared to two or years ago, with respect to what is okay for a private loan document.
In the bond market because it’s much more standardised this was much easier. But in the loan market, these things were not at all the norm two years ago.
So, I think there’s a bit of a tension now where some borrowers are facing pushback from the bankers causing some borrowers to reassess the format.
Stella Saris Chow, ANZ: Not every transaction has to have a label. We do have challenging conversations with our customers who have set targets and are making incremental progress where we may say, “You may want to wait until you can demonstrate the incremental steps to achieve it, rather than come to market too early.”
We partner with the borrower to really look at the structure, to make sure when it comes to market, everything has been thought through.
Martijn Hoogerwerf, ING: I think the topic of engagement is incredibly important because often we, as financial institutions, want to stay invested in a particular sector or company to “have a seat at the table” and drive the transition of that client. But then the question is, “What does that engagement actually look like?”
I would argue that, when you structure a sustainable finance product, going through a process of six to nine months of weekly calls on sustainability strategy, is a deep-dive engagement.
It doesn’t necessarily have to be through a sustainable finance product. A lot of banks, including ING, are now assessing our clients’ transition plans. We do this by looking at publicly available data and then engaging our clients on those data points.
We’re probably one of the earlier banks to do this. Certainly, investors are also looking at it from this perspective, so that’s another way of engaging with our clients on the topic of transition and, hopefully, driving them in the right direction.
LSEG LPC: One significant difference between the bond and loan market is that there are specific bond investors dedicated to investing in ESG instruments. Will the loan market reach that?
Martijn Hoogerwerf, ING: There are two elements to that. As a bank, our biggest impact is with our lending portfolio, so we need to decarbonise our loan book over time. That’s the real focus that we have. Separately, we have a sustainable finance target of €150bn (US$163bn) per year by 2027 so that’s also driving this discussion. Getting to net zero in our own loan portfolios is key.
Stella Saris Chow, ANZ: It’s challenging when you compare bonds to loans, because bonds are public with published frameworks. With borrowers on labelled loans, you can ask them to disclose, however it is not always agreed.
Often, the details remain private. As this product evolves, more transparency would be a good thing.
Colin Chen, MUFG: Can I just add that banks are not the only providers of loans? We’re seeing an increasing number of insurance companies, pension funds and sovereign wealth funds, participating as lenders. Their criteria are a lot more precise than the banks would be, because our Scope 3 is all the loans that we have on our books. So, that’s one of the drivers for us to meet net zero. That class of investors is getting very big in providing sustainable loans.
Atul Jhavar, Barclays: One more point to add is private credit, which has grown significantly in the last couple of years. While they may not have the same kind of public targets on financed emissions targets, like banks do, there are a significant number of them that will have a strong axe for ESG-positive or transition assets.
With significant pools of private credit, over time I think we will see money flowing into transition assets.
Martijn Hoogerwerf, ING: I have a question. We’ve seen two press releases on two German issuers who hold their banks accountable for their sustainability credentials. Has anyone seen this in the Asia-Pacific market?
Colin Chen, MUFG: Not yet.
Atul Jhavar, Barclays: How do they do that? That sounds interesting.
Martijn Hoogerwerf, ING: In the bond RFP, one of the credentials of the banks is its ESG commitments and ESG ratings.
Stella Saris Chow, ANZ: At times we see certain customers asking these questions. But increasingly we are being asked by clients, “What do we think of their ESG strategy?” and providing feedback from a bank’s perspective as a financier.
In this region sustainability disclosures will be supported by increased disclosure requirements from various regulators and exchanges.
LSEG LPC: Is there something similar to greeniums that lenders in the loan market are concerned about? Do borrowers twist your arm too much to get the terms that they want, and don't necessarily drive the sustainability outcomes?
Colin Chen, MUFG: It’s a balance, right? I mean, on one hand, you start off saying, “You’re not doing this just to get your 10bp discount,” or 1bp, or whatever the number is. The discussion also goes into whether they get a penalty if they go the wrong way, or a plus point if they go the right way.
I think that it has come to a point where it does not drive their decision to do the deal. There are other benefits, including signalling and getting the message to the market, and liquidity.
If you are doing an ESG deal and pricing is all the same, but you have a bigger market and it’s easier to sell, you’ve got a bigger, better name and the next year will be easier. So, I see the greenium coming down. There’s still a little bit here and there, but it does not push the deal over the line.
Stella Saris Chow, ANZ: Two-way pricing in the Asian markets is harder to agree, compared to where it is standard in most other markets.
The market has discussed a higher discount for sustainability outperformance, however the Asian loan market is extremely competitive so this is unlikely to be agreed.
We talked about high-emitting borrowers at the beginning. A more weighted towards penalty-type structure may be appropriate here and is worth considering.
Martijn Hoogerwerf, ING: I think we’ve made some progress in terms of seeing two-way pricing. If you just go back two or three years ago, it was significantly lesser. ING has sustainable finance guidelines, where we need two-way pricing and if a deal doesn’t have this, we need to get special approvals.
Atul Jhavar, Barclays: Ultimately, on pricing, in most jurisdictions, banks are not getting capital relief for green assets. So, somebody has to pay the cost. I’m not advocating, necessarily, that capital relief is the right solution. It may not be. Until we have enough data to prove that capital ratios actually benefit from green assets from a risk perspective, it’s a hard one to do, right?
I don’t think regulators will do it hastily. So, until that time, it’s more qualitative factors, like our targets and so on, that push us to do these deals, but, at the end of the day, they are not costless if you’re giving it at a discount, because you are not getting any capital relief for it.
LSEG LPC: We've seen some instances in Asia Pacific where financial sponsors have borrowed an ESG loan to fund a buyout. How difficult is it to structure something like that?
Martijn Hoogerwerf, ING: We’ve done a few of these transactions and timing is crucial. What we’ve seen, typically, is what we call ‘sleeping mechanisms’. Regardless of whether it is event-driven financing, sometimes timelines are misaligned. For example, if a client wants to close a transaction but an updated sustainability report is not yet out.
We will wait and then we give the client time, whether that be six to nine months, to then convert the loan documentation and implement those targets and KPIs. The key, from my point of view, is the commitment of the client. You don’t just want to insert sleeping language and give the borrower a free option.
Atul Jhavar, Barclays: Yeah, it’s quite a challenging situation because, in addition to the timeline issues, very often it’s hard for the sponsor to commit to what they can do with the company. They haven’t bought it yet, so, there’s a long way to go. Potentially the sponsors want to change management or rework strategy. How do you predetermine ambitious KPIs for a situation like that?
We are seeing a lot more interest from financial sponsors for coming up with structures that potentially work, because they are keen to start incorporating SLL features. So, I think it’s very much work in progress, and I think banks, including ourselves, are taking it case by case at this point.
Colin Chen, MUFG: My view is that you’ve already got so many hundred million moving parts on an event-driven transaction. And you’re talking about something which you do not own yet, so why complicate issues when what will get you across the line is pricing?
If pricing is not much different, then do a conventional loan, and then refinance it later when things are clearer to get across the line quicker. Again, it’s on a case-by-case basis, but it’s a lot of complication for little yield.
LSEG LPC: There was a deal which became the first publicly known financing by a data centre company to incorporate a gender-pay equity target. Also, it was the first SLL to include carbon usage effectiveness. What are your thoughts on that?
Martijn Hoogerwerf, ING: ING structured the very first sustainability-linked loan in 2017 for Royal Philips. Since then, we have structured more than a 1,000 of them. We started keeping count of the KPIs and have used 1,500 different KPIs across the 1,000 SLLs that we’ve done.
Having said that, companies do need to think very carefully about what addresses the most material sustainability topics for them and how to define a relevant KPI that they can track and improve on and do this on a yearly basis. Certainly, the company you refer to is very reputable and takes sustainability incredibly seriously and has put a lot of work and thought into this new KPI.
Stella Saris Chow, ANZ: But if you think about it from the KPI itself, we see a lot of financial institutions or funds having gender-mix KPIs. It might be 30% of women in leadership, broadly defined. For this deal, the KPI was quite specific and impactful, so, from a materiality and ambition standpoint, it’s great.
Then the question is, “Can you apply this broader, and what are the mechanisms to track that?” But I’m really encouraged to see specific KPIs that are actually focused on compensation, rather than more general gender diversity KPIs that we see.
LSEG LPC: Data centres are emerging as a very big sector raising loans. Are there any other sectors that you think are going to drive ESG financing flow, going forward?
Stella Saris Chow, ANZ: I think the obvious one is green transportation, which we’ve seen a lot of in Asia, US and Europe. That will continue to be a large area of use-of-proceeds green loans in the region. Along with the larger build-out of renewable energy assets in the region, but again that use-of-proceeds green loan is going to be much more interesting and straightforward.
I think what we’ve seen in the US is a lot of green project financings done in the renewable energy markets and in Taiwan. It is good to see labelling of those transactions.
Martijn Hoogerwerf, ING: We have done the most transactions in the financial institutions and the telecom, media and technology space. And I hope to see more action in the mining space and hard to abate sectors.
Colin Chen, MUFG: I hope transition finance will be the one that will come up this year.
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