ESG loans in South-east Asia fall 46% in Q1 2026 amid heightened volatility from Iran war
Proceeds from environmental, social and governance bonds decline 26.5% over the same period
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[SINGAPORE] Sustainable finance volumes in South-east Asia got off to a shaky start in 2026, as corporates focused on managing heightened volatility and uncertainty due to the ongoing Iran war.
Proceeds from loans tagged with an environmental, social and governance (ESG) label in the region tumbled to US$5.9 billion for the first quarter of the year, a sharp drop of 46.3 per cent from US$11.1 billion a year ago, indicated figures from financial data provider LSEG.
The same trend was also seen in the ESG bond market, with proceeds declining 26.5 per cent to US$4 billion from US$5.4 billion over the same period.
“The Iran conflict has added volatility and complexity to the operating environment, prompting many corporates to prioritise near-term operational and financial priorities, with sustainable financing potentially taking a back seat for the time being,” said Jeong Yoonmee, head of global wholesale banking sustainability office at OCBC.
ESG loans
The Asia-Pacific market, excluding Japan, also experienced a steep decline, with funds from ESG loans coming in at US$16.6 billion for Q1 2026, a 40.3 per cent drop from US$27.8 billion in the same period last year.
The global market, however, bucked the trend with proceeds rising 11.5 per cent to US$148.5 billion from US$133.2 billion over the same period.
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As shocks to energy prices ripple through the global economy, Asean corporates are likely to experience material impact on costs, liquidity and capital allocation over the next quarter.
“For businesses, sustained energy price volatility has translated into margin pressure and tighter credit metrics, particularly in energy-intensive sectors. This can delay sustainability-linked borrowing where near-term (sustainability) performance (targets) may be influenced by factors beyond management’s control,” said Adrian Ow, head of ESG strategy for group wholesale banking at UOB.
Issuing structured financing, such as ESG loans, requires more time to set sustainability performance targets, develop a framework and have these externally validated. Hence, corporates have deferred these fund-raising needs when visibility is limited, causing issuance activity to soften temporarily amid execution risk, he added.
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“In the near term, companies have adopted a more cautious stance amid elevated uncertainty and execution risk, prioritising balance sheet resilience and liquidity management,” he noted.
However, both Jeong and Ow said that the deprioritisation of sustainability among Asean corporates is temporary.
Jeong said that the banks continue to see strong decarbonisation momentum among their clients. Sustainability and energy transition are still key pillars of corporate strategies, even if timelines and financing approaches are being adjusted.
“By adopting a more pragmatic approach, some corporates may recalibrate targets, phase investments more carefully, or refine their transition strategies to ensure they remain realistic and achievable,” she added.
Ow also echoed the same sentiments, adding that the decline in issuance is largely due to a shift in timing as companies wait for greater clarity and stability before returning to market.
In fact, the Iran war actually reinforced the importance of the low-carbon transition for corporates.
Renewables are increasingly seen as critical for energy security as it reduces exposure to oil price shocks and geopolitics over the medium to long term, even as Asean governments and corporates prioritise immediate relief measures in the short term, said the bankers.
Ow said that ESG loan issuance is expected to be more selective than volume-driven over the next few quarters, with more emphasis on transition finance rather than just pure-green assets.
“Against a backdrop of geopolitical tensions, potential rate volatility, slower growth and heightened scrutiny of greenwashing, corporates are becoming more selective and strategic in how they engage with sustainability financing,” he added.
Jeong said that ESG loan volumes would likely move in line with broader loan market conditions.
“Despite geopolitical uncertainty and economic pressures, the transition agenda remains firmly in place among Asean corporates… The low-carbon transition has become part of their strategy to stay resilient and competitive. Investments in energy efficiency, clean energy and transition technologies are increasingly viewed as essential for future-proofing businesses,” she added.
UOB overtook OCBC to be the top arranger for ESG loans in South-east Asia in Q1 2026, with US$1.3 billion raised. OCBC came in a close second, after topping the league table for most of 2025, at US$1.1 billion. DBS is third at US$745 million.
ESG bonds
Issuance volumes for ESG bonds also declined outside South-east Asia. Proceeds came in at US$37 billion in Q1 2026, a comparable decrease with South-east Asia at a 24.7 per cent decline from US$49.2 billion for the same period last year.
The global market performed better with ESG bonds dropping slightly by 2.9 per cent to US$217.1 billion from US$223.5 billion over the same period.
The lower issuance volume for ESG bonds reflects a market wide phenomenon seen in global bond markets – which also includes non-ESG bonds – and is not an ESG-specific retreat, said Rahul Sheth, managing director for debt capital markets and global head for sustainable bonds at Standard Chartered.
Bond issuance volumes for Group of 3 markets, as well as Asia-Pacific excluding Japan, are down 20 per cent year-on-year for Q1 2026, compared with an increase of 25 per cent year-on-year before the Middle East conflict broke out, he pointed out.
As the initial shock subsides and risk pricing stabilises, Sheth expects issuers to return to the broader bond and ESG market, especially as the energy crisis reinforces the long-term case for energy transition.
“We have already seen issuers take advantage of short conducive windows during this period. It is important to note that during such periods, issuers are more focused on opportunistic and timely market access as the main priority,” he said.
However, even as companies are actively discussing ways to redesign energy infrastructure to reduce their exposure to price swings and supply risks, these shifts require significant capital expenditure and long lead times, said Max Thomas, head of sustainable capital markets for Asia-Pacific at HSBC.
ESG bond issuances are expected to gradually recover over the next few quarters. International capital continues to show interest in climate-related investments, and green projects still enjoy relatively favourable funding terms.
“While near-term policy responses may differ across the region, the long-term decarbonisation trajectory will not be derailed by a short-term increase in fossil fuel reliance. Asean corporates are likely to sustain their transition efforts, and the ESG bond market is likely to recover as market conditions normalise,” Sheth added.
Thomas said that there will still be momentum for ESG bond issuance as sustainability is increasingly considered from the perspective of financial materiality. This is especially as the volatility of energy prices has made the cost of carbon and energy dependence visible in daily operating expenditures.
“We expect more issuers to use ESG labels to communicate the business case for transition – starting with energy resilience, and broadening into areas like water and resource efficiency,” he added.
The top bookrunners for ESG bond deals in South-east Asia in Q1 2026 were Standard Chartered (US$1.7 billion), HSBC (US$863.3 million) and CIMB (US$372.6 million).
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