Tapping the opportunities in Asia’s growing sustainable bond market

Asia’s sustainable bond market bucked the global trend and issuance grew strongly in the first half of 2022 despite volatility in the bond markets. We expect the market to continue growing despite heightened inflation risks and rising geopolitical concerns. The expanding universe should present increased opportunities and greater diversification for investors.

The COVID-19 pandemic helped draw attention to environmental and social issues in the last two years, in turn fuelling inflows into responsible investments and boosting issuance of sustainable debt (bonds and loans). ESG debt funds attracted inflows of over USD135 billion in 2021, up from USD55 billion in 2020. Meanwhile, global sustainable debt issuance reached a new record of over USD1.4 trillion in 2021, almost double the previous year1.

This momentum appeared to falter in 2022, as rising inflation and interest rates caused significant turmoil in global bond markets. Global sustainable debt issuance fell to USD645 billion in 1H22, nearly 15% lower than in 1H21, although debt issuance picked up in the second quarter2.

The picture was somewhat more encouraging in the Emerging Markets (EM) and Asia. See Fig 1. Emerging and frontier markets issued over USD120 billion of sustainable debt in 1H22, up from USD100 billion in 1H21. Within EM, China was the largest issuer, raising USD73 billion in 1H22, followed by Turkey and the Philippines. On the other hand, issuance from Russia and India fell sharply3.

Fig. 1. ESG debt issuance – China maintained strong momentum in 1H22.

 ESG debt issuance – China maintained strong momentum in 1H22

We expect Asia’s sustainable bond market to continue to grow despite rising rates, heightened geopolitical risks and the potential divergence in decarbonisation trajectories regionally.

Thanks for subscribing!

Follow us :

Geopolitical tensions will not derail Asia’s growth

Geopolitical concerns are not new - at the peak of the US-China trade tensions in 2019, there were fears that US- based investors could be discouraged from owning Chinese assets. The Russia-Ukraine war has once again thrust geopolitical concerns into the limelight, as the relationship between US and China further deteriorated following Russia’s invasion of Ukraine.

The world cannot afford to ignore China in the transition to a zero-carbon world. With China accounting for more than a quarter of the world's overall greenhouse gas emissions, China’s decarbonisation journey matters. The more viable approach is therefore greater engagement, rather than avoidance. Hence, we believe that there will continue to be investor demand for China’s sustainable bonds. China’s issuance is also likely to remain robust as the sustainable bond market remains an important financing avenue for China in its net neutrality journey. In 2021, China accounted for 65.2% of the new issuance of sustainable bonds in Asia4.

That said, the Russia-Ukraine war has highlighted ESG risks for sovereigns. At Eastspring, we incorporate both international and national data in our sovereign ESG evaluation and assign additional weight to the governance factor as it disproportionately influences policy and the country’s overall ESG efforts. While we score and rank sovereigns by their ESG risks, we also consider how prepared the countries are to address material ESG challenges.

Asia’s decarbonisation trajectory remains intact

The growing focus on energy security following the Russian-Ukraine war should accelerate transition efforts to alternative and cleaner forms of energy. However, it could derail Europe’s net zero course in the near term although Asia’s decarbonisation trajectory is likely to remain intact.

European net-zero plans had included swapping coal for natural gas-fired power. However, supply shortages had lifted natural gas prices by almost 600% in Europe in late 2021 and the situation has been further compounded by supply disruptions arising from the Russia-Ukraine war in 2022.

As such, the pace of planned shutdowns for coal-fired power plants has slowed in Europe. Ireland and Poland have reportedly increased their use of coal plants as natural gas prices soared. The UK restarted an old coal plant, and the government may delay the closure of its remaining coal power plants. Meanwhile, the German government has passed emergency laws to reopen mothballed coal plants for electricity generation.

Asia is less reliant on Russia for its energy sources and hence the disruption in supplies is expected to have limited implications for Asia’s net zero journey. Importantly, many Asian economies have re-affirmed their net zero commitments at COP26, and their National Determined Contributions (NDCs) are likely to be strengthened prior to COP27 in November 2022.

With climate change forecasted to hit Asia the hardest5, there is increasing recognition in the value generated from having sustainable growth strategies and the costs of not taking environmental risks seriously. It is also widely acknowledged that massive funding is required to combat climate change, and a large part of the financing will come from the bond market, in the form of sustainable and green bonds. 

Across Asia, we have seen governments and policymakers make a concerted push to catalyse the growth of sustainable/green funding markets across their jurisdictions. These efforts are clearly bearing fruit, as seen from the strong growth of Green, Social and Sustainability (GSS) bond issuances in Asia over the past two years amid broader challenges (higher yields, poor investor sentiment and tightening financial conditions).

Tapping on the opportunities

We look to increase the weights of GSS bonds in our portfolios as the investible universe continues its healthy expansion. Compared to two years ago, we have seen GSS issuances from more diverse sectors and countries, as issuers find specific use cases for bond proceeds amid expanded taxonomies.

In Asia, there is a good base of high quality (A-rated and above) GSS bond issuers out of Japan, Korea and to some extent, China. Even as the risk environment deteriorated over the last few months amid tightening financial conditions, the credit spreads of these issues have not widened significantly, further augmenting their status as defensive assets.

The financial sector will continue to play an important role in channelling funds towards sustainable activities. Fig. 2. Many banks that are active in Asia have drawn up a Sustainable Finance framework and strategy, which involves making specific commitments and targets to finance sustainable activities. Issuance of GSS labelled bonds will contribute to these efforts, and we expect to see more financial issuers going forward. With the real estate sector accounting for 40% of global carbon emissions, there is also a big role for the real estate sector and property owners. We have seen REITs and property developers in Singapore issue bonds where the proceeds are used to invest in green technology infrastructure to make buildings more energy efficient.

Fig. 2. Since 2013, utilities and financials have accounted for most of total issuance

Since 2013, utilities and financials have accounted for most of total issuance

Asian policy makers continue to develop the sustainable bond market ecosystem within the region. Research suggests that higher disclosure requirements, introducing external certifications and expanding taxonomies can help reduce information asymmetry and reduce funding costs for reliable green issuers6. At the same time, studies show that frequent bond issuers pay lower yields as greater information transparency gets priced in by potential investors. This should help to encourage repeated issuance and deepen the market further7, presenting investors with more opportunities and greater diversification.

1 Sustainable Debt Monitor. Institute of International Finance. January 2022.
2 Sustainable Debt Monitor. Institute of International Finance. January 2022.
3 Sustainable Debt Monitor. Institute of International Finance. July 2022.
4 Sustainable Debt Monitor. Institute of International Finance. July 2022.
5 ASEAN + China, Hong Kong, Japan and South Korea. Asia Bond Monitor. March 2022.
6 Asia Bond Monitor. March 2022.
7 Asia Bond Monitor. March 2022.

This document is produced by Eastspring Investments (Singapore) Limited and issued in:

Singapore by Eastspring Investments (Singapore) Limited (UEN: 199407631H)

Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws

Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).

Malaysia by Eastspring Investments Berhad (200001028634/ 531241-U) and Eastspring Al-Wara’ Investments Berhad (200901017585 / 860682-K).

Thailand by Eastspring Asset Management (Thailand) Co., Ltd.

United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.

European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.

United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.

Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.

The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.

The views and opinions contained herein are those of the author, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this document is at the sole discretion of the reader. Please carefully study the related information and/or consult your own professional adviser before investing.

Investment involves risks. Past performance of and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.

Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.

Eastspring Investments companies (excluding joint venture companies) are ultimately wholly owned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including joint venture companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company Limited, a subsidiary of M&G plc (a company incorporated in the United Kingdom).