Asia’s green bond issuers look past pricing to branding and investor access

Janice Lim
Published Mon, Sep 19, 2022 · 05:50 AM

WHEN the green bond market was still in its infancy years ago, its advocates would often tout the potential for green bond issuers to raise capital at lower yields compared to conventional bonds.

The implied promise was that issuers could access cheaper cost of funding, with investors willing to pay a premium if they were assured that the proceeds would be used for projects that have environmental or social impact.

This idea of a green premium, which has been termed “greenium” by the market, was also supported by the thinking that there would be more investors aligned with environmental, social and governance (ESG) concerns, which can provide the price tension to bring down an issuer’s interest expense.

Fast forward to 2022, and the greenium in Asia is still elusive even as the region’s sustainable debt market has grown.

“The concept is logical, but the fact of the matter is, it is a developing concept,” said Clifford Lee, head of fixed income at DBS Bank. “And conventional bond investors outnumber green bond investors or dedicated green bond investors. When that was realised, the market had already accepted the fact that, frankly, this greenium they talked about hasn’t materialised.”

The challenge in determining the presence of greeniums in Asia is due to the nascency of the labelled bond market, the lack of liquidity in the secondary market, as well as the volatility in capital markets this year, making it difficult to drill down the difference in premiums to a single factor.

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Years ago, the lack of a lower cost of funding to make up for the higher cost of compliance would have turned away issuers. These days, however, the increasingly inevitable climate movement means that issuers’ decisions have become multi-dimensional.

Bankers and fund managers told The Business Times that a pricing advantage is no longer what motivates issuers to issue such bonds. Instead, they are being strategic about their branding and their ability to access diverse markets.

Issuing green bonds became the simplest first step for corporate issuers in Asia wanting to present themselves as ESG-conscious and ESG-responsible borrowing participants, Lee said.

For sovereign issuers, green bonds also become a natural pathway to finance programmes to help meet governments’ net-zero targets, said Amanpreet Singh, director of ESG finance in Asia-Pacific at MUFG Bank.

Driving these developments are the mainstreaming of ESG considerations into investment decisions, along with government regulations.

Sean Henderson, managing director of HSBC Bank in Asia-Pacific, as well as the co-head of its debt capital markets, pointed out the number of signatories to the United Nations-backed Principles for Responsible Investing has tripled in the last 10 years.

This has resulted in sustainable bonds attracting wider investor demand compared to conventional bonds.

Underlying investor demand for labelled bonds would then help issuers to access a more diversified investor base, said Nicole Lim, ESG investment analyst for fixed income at asset management firm abrdn.

Rahul Sheth, global head of sustainable bonds in debt capital markets at Standard Chartered Bank, pointed out that funds meant to invest in green products are mushrooming, and some investors with ESG mandates are able to “tick the box” by investing in labelled products.

Besides being able to access a more diversified group of investors, green bond issuances is also a way for issuers to improvement their engagement with investors on ESG factors, and this should lead to improved order book outcomes, particularly for issuers in challenging sectors, noted Henderson.

In fact, investor order books are often stronger for ESG deals than conventional deals, he noted.

Green credentials are increasingly becoming part of corporations’ hygiene factors, said Sheth. Issuers would not be able to do a full marketing presentation to investors without showcasing their ESG markers, even if they are only looking to issue conventional bonds. Even the refinancing of conventional debt are increasingly moving to a labelled format.

And to get noticed by investors, issuers can’t just issue green bonds as a one-off exercise. In fact, Lee pointed out that several issuers already have green projects on their books, which can be financed by conventional bonds. But their green bond offerings are a re-tagging exercise.

“So now when people issue green bonds, it is with that concept. It is not just for short-term commercial savings alone, but for long-term establishment of what the issuer represents,” he said.

“From an ESG investment standpoint, it is going beyond price differentiation. It leads to a right of access... If you are an ESG-destructive issuer, not only will you have a pricing disadvantage, you won’t have the right to access the market to begin with. So the consideration is shifting beyond pricing advantage. It’s access advantage.”

Lim anticipates that the labelled bond market for both corporate and sovereign issuers in the Association of Southeast Asian Nations (Asean) market will continue to grow.

“This is underpinned by the strengthening of standards and guidance such as the Asean Green, Social and Sustainability Bond Standards as well as the Asean Sustainable Finance Taxonomy. In the recent times, we’ve seen several Asean countries publish sovereign sustainable finance frameworks and issued labelled bonds out of them,” she added.

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