11 April 2022
APAC's insurers tell David Walker they want more green and sustainable bonds - including more of the high-quality paper from their own neck of the woods
Asia Pacific (APAC) nations stand at varying stages of helping green bond issuance meet "insatiable" over-demand from insurers and other institutions. But if the demand-gap remains large, so, too, is the ambition to narrow it, from Georgia to Indonesia, the Philippines to South Korea.
Asian issuers fed $161bn of green, sustainability, social and transition bonds onto markets in 2021, according to Environmental Finance's bond database – quite a leap from $69bn in 2020. And Fiji plans a 'blue' bond this year after its successful green one of 2017, while the Philippines recently announced $500m worth to finance climate projects, and Hong Kong and Beijing have their own busy green pipelines.
APAC policymakers and central bankers designing frameworks for green bonds and loans in some of the region's developing economies are consciously proceeding thoughtfully, methodically, though mindful of satisfying investor standards including for use of proceeds and disclosures, subsequent reporting, and avoiding any 'greenwashing'.
When the region's 'green bonds tap' turns more fully on – as numerous governmental climate targets suggest it surely must - insurers stand very ready to absorb supply.
Demand was already evident for years in Australia, according to Katharine Tapley, head of sustainable finance at ANZ bank, but it has become "more insatiable each year...and it is exponential growth in demand - a 'hockey stick' at a 90-degree angle".
One senses even if green debt in APAC doubled this year - as Clifford Lee, DBS Bank's global head of fixed income says it easily could – investor thirst would remain.
For Michael Vos, managing director, regional investment manager for Asia Pacific at Zurich Insurance Group, the main bottleneck stifling more investment, is a lack of more instruments - currently at least.
That state of affairs is a good sign for both government and the private sector according to Ruhimat Soerakoesoemah, head, sub-regional office for South East Asia, at the UN Economic and Social Commission for Asia and the Pacific, ", [and] what needs to happen is the creation of good investments that will allow for green/sustainable bonds to be issued".
"Looking at countries like Indonesia, Thailand, and the Philippines drawing more interest from international and institutional investors, there is a strong upside for such a market. Also considering countries like Cambodia and Vietnam increasing efforts to develop their capital markets also contribute to the bright prospects of the sub-region. What is required is a better understanding of what the demand is, and where it is coming from, and how best to cater to these investment opportunities."
Against this backdrop, Soerakoesoemah sees the need for stakeholders "to promote awareness and standards - a shared responsibility and consolidated effort of everyone committed to the sustainable development goals (SDG) agenda". Governments will need to establish requisite infrastructure and legal frameworks, while private players progress the agenda.
If COVID-19 had a silver lining, in Soerakoesoemah's view it was to "further raising the importance of the [UN] 2030 Agenda" for Sustainable Development. Especially the developing countries have "sought increased support and assistance from the government and UN in framing a sustainable agenda at national and regional levels, or at least aligning their national plans" with that agenda, he says, calling this "a strong indication" of countries stepping up efforts in addressing the pandemic's socio-economic impacts.
Quality trumps pure quantity
ANZ's Tapley is one of numerous voices agreeing supply cannot sacrifice quality. Innovating on product and educating borrowers while ensuring the "credibility and robustness" of the market are key challenges that she names, adding "demand needs to be filled with impactful ESG structures. We all have our roles to play to ensure the market is credible and robust. It is not a commoditised product, it is bespoke lending whether in bank loan or bond format, so sustainability strategies must lead the borrowing format."
With that in mind, across APAC authorities are preparing the groundwork, carefully.
Georgia, for instance, chose to take the time to develop a bespoke taxonomy for sustainable finance.
Mariam Kharaishvili, chief specialist, macrofinancial modelling and analysis division, financial stability department, National Bank of Georgia, says some differences in understandings and definitions of green finance, bonds and loans among the country's commercial banks is one reason for developing the country's taxonomy. "We could have probably adopted one of the already-established taxonomies, such as the EU taxonomy - but we chose to develop our own. There are several reasons for that, such as the need for taking into account specifics of the Georgian financial system, the development stage of sustainable finance, and sustainability issues relevant to Georgia," she says.
While Georgia's taxonomy is designed primarily to meet the needs of its predominant commercial banks, "it can also be used by other market players, such as bond issuers, investors, certifiers, verifiers, and so on".
Georgia's taxonomy will not be foreign to those in other countries – "the SF taxonomy was designed in consistency with the best international practice and has distinctive characteristics suitable for Georgia," Kharaishvili says. Georgia's taxonomy is planned to share common ground with others from the Climate Bonds Initiative, China's SDG taxonomy, the EU sustainable finance taxonomy, and ICMA principles, for instance.
Some Georgian companies have issued bonds already, and Georgia is building awareness, and capacity, for more.
Its central bank is about "making the market aware of options they have in terms of issuing green bonds and loans and how they can benefit from it," Kharaishvili says. The National Bank of Georgia publishing a sustainable finance roadmap in 2019 marked "a key milestone in developing a sustainable finance framework", she adds, as was integrating ESG considerations in corporate governance codes for commercial banks and capital market participants.
Other supportive measures the National Bank of Georgia has been involved in include workshops for stakeholders, research on sustainable finance topics, establishing sustainable finance working groups, looking into ways to incentivize/stimulate sustainable finance flows, and developing ESG risk management guidance and tools more generally. On important transparency and market discipline, there are minimum ESG disclosures, progress-management tools; and information hub.
Treading carefully with taxonomies
The ANZ's Tapley and Emily Tonkin, executive director in ANZ's sustainable finance team, echo a sentiment expressed separately by many investors, that taxonomies of 'green' activities should have leeway to reflect distinct national conditions.
Tapley sits on the board of the Australian Sustainable Finance Initiative which is collaborating with the industry to create a taxonomy for Australia's financial markets. That initiative "will not be reinventing the wheel", she says, "as there is a lot to be learned from what already exists - particularly in EU jurisdictions and others similar in nature to Australia. You need to make use of what already exists, and have some level of harmony and uniformity globally, because we are in global markets".
But Tapley adds: "We should recognise there are differences and we have to take into account the make-up and nature of our existing economy."
Addressing commonalities in the market, Tonkin adds that the Asia Pacific Loan Market Association's principles are aligned on engagement issues with others in the US and UK.
Standardisation of the sustainable finance loan market "has already come a long way in a relatively short period", she says, even if loans are "much more nuanced" than green bonds whose issuers and lenders understand the standardised criteria. Even if standardisation is incomplete for sustainability-linked loans, "there are expectations of targets. They may not be standardised around a 'percentage of impact each year', or what the level should be, but we are starting to see a settling on the metrics used", Tonkin explains. One can deviate from those, "but when that happens questions may be raised". Tonkin cites here the expectation among investors that sustainability instruments will address emissions in some way.
Another area where policymakers, issuers and those helping them, are working to meet expectations of investors such as insurers, is on transparent disclosure on issuance, and follow-up monitoring/reporting, including of impact.
The transparency imperative
Feng Hu, vice oresident, credit & ESG advisory origination, treasury & markets at DBS, says issuers of sustainable bond instruments need to place the intended use of proceeds for green, social or sustainability bonds, or the selected key performance indicators and targets for sustainability-linked bonds, in the context of their overall sustainability strategy.
"This is especially true for companies operating in sectors that need to transition towards low-carbon and sustainable business models, in order to demonstrate the alignment with pathways required to meet the goals of the Paris Agreement," Hu explains.
Hu notes having seen interest and efforts from some Asian regulators in devising 'transition-specific taxonomies', which to his mind "will further help guide sustainable bonds issuers in better 'telling stories' about their sustainability strategies and rationales in using various sustainable bond instruments".
After placing one's sustainable/green instrument with an insurer or other allocating lender, top-grade reporting is critical, practitioners and investors agree.
DBS's Hu says: "Reporting helps ensure transparency and integrity of sustainable bond markets. For APAC issuers, reporting for specific bond issuances need to be seen in the overall efforts in improving corporate disclosures. In addition to reporting on how proceeds are being used, issuers should be encouraged to report on expected impacts from the financing."
"There also needs to be some consistency in how issuers report on impacts, in order for investors and the wider market to track and benchmark the environmental and/or social benefits from the investments."
With policymakers across the APAC region keen to reflect advice from market practitioners, including insurers, in how their specific jurisdictions develop green/sustainable finance frameworks, one senses reliable reporting and disclosure practices will be high on the agenda, too.