APAC sustainable bond volume slows in H1, but outlook is resilient: Moody’s
Sharanya Pillai
GREEN and transition financing are set to keep growing in Asia-Pacific, even as market headwinds slowed the region’s sustainable bond volume in the first half, ratings agency Moody’s said in a Tuesday (Aug 2) report.
The volume of green, social, sustainability, and sustainability-linked (GSSS) bonds in Asia-Pacific totalled US$86 billion in H1 of this year, down 33 per cent from a year ago.
“The broader fixed-income market conditions have adversely impacted sustainable bond volumes so far in 2022, as the Russia-Ukraine military conflict has impaired global economic growth prospects, stoked existing inflationary pressures and heightened the prospects for accelerated monetary policy tightening,” Moody’s said in the report.
GSSS volume fell 48 per cent in the second quarter, which marks the lowest quarterly volume for issuance since the fourth quarter of 2020, and a sharp slowdown from the record-high volume in Q2 2021. Green bonds, social bonds and sustainability bonds saw declines of 33 per cent, 64 per cent and 69 per cent respectively.
That said, Moody’s noted that the volume of sustainability-linked bonds (SLBs) remained resilient in Q2, flat from a year ago and 20 per cent higher than in Q4 2021. This comes as Asia-Pacific issuers are diversifying into SLBs from traditional green bonds. SLBs typically contain performance-linked structures, where the coupon might step up if the borrower fails to achieve certain sustainability-related key performance indicators (KPIs).
While SLBs are still at an early stage in the region, quarterly SLB volume has remained above US$2 billion since Q2 2021 – except for the first quarter this year. Moody’s attributed the rising market interest to the instrument’s flexibility in allowing proceeds to be used for general corporate purposes, and to be linked to ESG-related key performance indicators to help transition companies towards sustainability.
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While green bonds are still the most common type of sustainable debt instrument in the region, the share of green bonds in Asia-Pacific GSSS issuance volume declined to 52.9 per cent in 2021, from 87.6 per cent in 2018. Social bonds accounted for 27 per cent of 2021’s issuances, followed by sustainability bonds (16.2 per cent), SLBs (3.3 per cent), and transition bonds (0.5 per cent).
Looking ahead, Moody’s expects that the region’s green and transition financing will continue to grow despite market uncertainties. This is due to net-zero commitments from the likes of China, which has national green finance polices to support its 2060 carbon neutrality goal.
“Also, given APAC’s inherent challenge of having a high proportion of hard-to-abate sectors, coupled with an insufficient amount of eligible projects to finance using use-of-proceeds bonds, transition financing via SLBs and other transition instruments will continue to gain traction in the region,” Moody’s said.
Financing for social projects via social bond or sustainability bond issuances will likely focus on addressing public health and socio-economic issues, as governments shift their pandemic response from crisis containment to recovery, the ratings agency added.
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