If there is to be any chance of hitting the annual $1.5 trillion climate finance target set by the United Nations in November 2017, a creditable sustainable finance ecosystem in the Asian region is vital.
A key criteria is the establishment of financial centres which can scale up green and sustainable financial services across capital markets, banking, fintech, insurance and investment.
The lack of a dedicated green exchange has led many Asian green bond issuers to list on European exchanges over the last four years.
If you take Chinese issuance out of the equation, the performance of the remainder of Asia is an embarrassment. Last year China issued $31.2 billion of internationally-aligned green bonds, including ICBC’s $1.58 billion offering of certified climate bonds on the London Stock Exchange in July last year, accounting for 18% of global issuance.
But the Association of Southeast Asian Nations (Asean) had issued only a paltry $5 billion by the end of November. And that included the $1.25 billion green sukuk issued by Indonesia in February.
Stock exchanges are critical to develop sustainable finance ecosystems. But while Hong Kong and Singapore have started to catch up, much more could, and should, be done.
STUNTING GROWTH
This is not to say that there is no demand in Asia.
“We are very encouraged by the strong reception among bond investors within the current volatile environment,” Cora Dizon, AC Energy’s chief financial officer said when he announced the group’s $410 million dual tranche issuance in January.
The Asian Development Bank and the International Finance Corporation came in as cornerstone investors on the deal.
So what must be done to raise levels of green bonds in Asia? A vibrant domestic green bond market can overcome some of the main impediments that sustainable finance has faced since the first green bond was launched in 2007. More to the point it doesn’t rely on development banks as underwriters.
Hong Kong created the Hong Kong Green Finance Association to promote green finance and investment, but only in September last year. Meanwhile, Singapore’s first green bonds were only issued in 2017.
European exchanges, on the other hand, such as Luxembourg and London with their dedicated green bond segments and clear regulatory requirements, have led to more engagement from both issuers and investors.
There are no doubts there about what constitutes a green bond. The requirements are crystal clear. At the moment, globally recognised standards, such as the green bond principles promoted by the International Capital Markets Association (ICMA) differ greatly from the standards adopted by Chinese regulators, for example.
This is precisely where Europe’s sustainable finance model could help.
The European Commission released its action plan on financing sustainable growth in March last year.
Three key legislative proposals were put forward for debate. The first was the establishment of an European Union classification system for sustainable activities, the second highlights the need to incorporate sustainability in investors duties and the third was the establishment of low-carbon benchmarks.
All three of these proposals are key to the further development of sustainable financial markets, according to the Climate Bond Initiative.
While some Asian exchanges have introduced incentives for issuers to use their jurisdiction, homogenising the rules and regulations are vital to create a deep and liquid market for both issuers and investors to participate. A separate segment on exchanges for green bonds with clearly defined regulations and standards must be taken.
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