BONDS with environmental, social and governance (ESG) objectives will continue to be a key growth driver for the Asia market, and it will account for between 35 per cent and 40 per cent of overall bond issuances in Asia in 2023, driven by investment-grade issuers, as well as sovereigns, said investment bank JPMorgan.

Central banks developing climate stress testing, scrutiny on how rating agencies come up with their metrics, more disclosure requirements and guidelines, as well as sector guidance released by the Science Based Target Initiatives are some factors facilitating this growth.

This projected percentage increase is higher than current levels, where ESG-labelled bonds make up 28.2 per cent of total bond supply in Asia, excluding Japan, from the beginning of this year to Oct 17.

The percentage of ESG bonds in Asia in 2022 is also higher when compared to 2021, when ESG bonds accounted for 19.9 per cent of the total issuance volume.

In addition, this increase took place in a context where overall bond issuance have fallen amid market volatility through most of 2022.

JPMorgan noted in its report on ESG financing outlook for 2023 released on Wednesday (Oct 19) that the total bond supply volume year to date in Asia ex-Japan is at US$49.4 billion, down from US$62.8 billion over the same period last year.

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“The bond volumes have been significantly lower this year compared with last year, and it will take some more time before the markets recover. I do expect the second half of 2023 to be better than the first half as interest rates stabilise. We expect investors to continue looking at alternate options including private placements and financings before bond markets are fully back on track,” said Madhur Agarwal, head of debt capital markets for Asia ex-Japan at JPMorgan during a media briefing on the same day.

ESG bond supply in Asia for the whole of 2022 is expected to come in at US$70 billion, which is unchanged from last year, although total issuance volume has gone down by 56 per cent.

The finance sector continues to drive bond issuance, with financial institutions making up 44 per cent of ESG bond supply.

A majority of these issuances (73 per cent) were green bonds, while sustainability-linked bonds came in second place (19 per cent).

China (49 per cent) and South Korea (26 per cent) were the main drivers of ESG bond growth in this region.

The South-east Asian market accounted for 15 per cent of ESG bond supply, while India made up 6 per cent.

Within China, the ESG bond market made up 49 per cent of the overall market, increasing from 46 per cent the year before.

Banks dominated issuance volume as they were focused on transmitting the country’s transition plans.

The onshore ESG bond issuance volume also hit US$167.8 billion year to date, an increase of 21.7 per cent over the same period last year. Conversely, offshore ESG bond issuance declined 10.8 per cent to US$25.7 billion.

In South Korea, ESG bond issuance remained stable from last year, and accounted for 26 per cent of the overall volume, with issuers from various industries including insurance, energy, banks and auto.

As for South-east Asia, sovereigns from the Philippines and Indonesia dominated bonds that are US-denominated.

The Singapore dollar was also a currency of choice for several issuers in the region.

The number of issuances in India fell, but JPMorgan expects a rebound as markets stabilise.

Across the globe, JPMorgan’s report stated that the demand for ESG bonds outweighs its supply, as its order books are larger than conventional bonds. Among US-denominated bonds globally, green bonds received subscriptions 3.8 times the amount on offer, compared to the vanilla equivalents.

There was no obvious evidence of a premium on pricing found for green bonds in the current market as investors are more focused on defending returns. Market players had earlier told The Business Times that Asian issuers are looking past pricing benefits, termed as ‘greenium’, and are being strategic about their branding and investor access advantage.