Asean’s sustainable debt sees first full-year decline in 2022 with a 32% contraction: report

SUSTAINABLE debt issuances in South-east Asia saw a 32 per cent contraction for the whole of 2022, compared to the previous year. This marks the first time the amount issued in the region experienced a year-on-year decline, as it suffered from rising inflation and interest rates that had negatively impacted global capital markets activity.

Despite the on-year contraction, issuances remained robust at US$36 billion – almost double the level in 2020, said a report by Climate Bonds Initiative and HSBC Bank on the state of sustainable debt in Association of South-East Asian Nations (Asean) markets.

The decline in issuances varied across the range of sustainable debt structures.

Green bonds and green loans fell the least at 26 per cent, while sustainability-linked bonds (SLBs) plunged by almost 90 per cent. Sustainablity-linked loans (SLLs) also declined significantly, at 40 per cent.

Loans remain the most popular debt instruments in the region, with SLL issuances at the top.

As expected, more sovereign issuers entered the market – and as they tend to be larger issuers, the average amount per issuer in 2022 rose, almost doubling the levels seen in 2020.

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Transition bonds are still rare in Asean despite regulators push for greater financing for brown-to-green transition activities.

“This is likely a result of the lack of a widespread ‘transition taxonomy’ which can be used to qualify eligible investments, and the fact that performance-linked instruments (SLBs and SLLs) have emerged as the preferred mechanism to finance entity-level transitions,” said the report.

Singapore remains the market leader in the region, even though issuances dropped 45 per cent year on year, which is a higher rate of decline than the 33 per cent drop in Thailand.

Sustainable debt issuances in Indonesia rose 33 per cent, while it went up by 347 per cent in the Philippines due to sovereign issuers entering the market in these two countries.

Overall, Singapore accounts for 63 per cent of cumulative issuance, slightly above the 60 per cent in just 2022.

The report said that there may be further convergence across Asean in the years ahead, along with the entry of new countries from the region.

The decline in overall sustainable debt in 2022 was driven by a fall in corporate issuances, especially in green bonds, though it is still the most popular bond type.

Sovereign issuance, which is generally concentrated in sustainability bonds, remained relatively robust.

This is as governments tend to be the least likely issuer type to be affected in adverse market conditions, especially when neighbouring or peer countries show leadership in the market. And this trend seems to be present in the Asean region.

The report also noted that the deal sizes have grown larger, with a higher share of deals that benchmark-sized at least US$500 million. There was a much-lower share of small deals in 2022 alone versus Asean’s cumulative issuance.

“The outreach of sustainable financial markets is extremely limited, with a sizeable gap in sustainable financing, especially for small and medium-sized enterprises,” noted the report. “Ultimately, organisations of all sizes will need to finance their transition and sustainable activities.”

Issuances in 2022 also had relatively longer tenors than compared with the cumulative issuances.

“This may reflect adverse and volatile market conditions, with issuers favouring longer-dated projects or instruments, or are refraining from issuing shorter-term debt and waiting for more favourable interest rates,” read the report.

Among green bonds and green loans, there were more issuances in local currencies.

Only 20 per cent of the 2022 green volume was issued in foreign currencies, compared with 33 per cent cumulatively.

An increasing share of local currency denomination is generally a positive sign, suggesting that domestic markets are becoming more developed and local and regional investors are playing a larger role, noted the report.

While the SLL market is slightly larger than green debt instruments, there was a high share of issuances denominated in the US dollar and also fewer currencies used.

This could be because a higher share of local and smaller issuers were using green debt instruments compared with larger international ones among SLLs.

While Asean has made progress in growing its sustainable debt market, the report laid out several recommendations to further develop the space. These include:

• Developing green and transition taxonomies that are science-based, granular, inclusive and robust as much as possible

• Increasing the level of ambition over time by revising taxonomic classifications in line with the necessary ambition of relevant national and sectoral pathways

• Setting up guidelines and frameworks for entity transition plans and strategy disclosures that allow financial institutions in the region to monitor if issuers or borrowers are on track to reduce carbon emissions and risks in line with agreed targets

• Implementing mandatory transition plan disclosure

These would build on the relevant policies and initiatives were announced and implemented by Asean regulators during 2022 and complement frequent sovereign issuances which have become the norm in Asean and set a very promising tone for the future of sustainable finance in the region, noted the report.

“They indicate a high level of interest from governments in the region to develop the market,” it added.