THE public sectors of South-east Asian countries will be the main drivers of the region’s sustainable bond issuance in 2023, as its governments continue to push for their economies to transition to a low-carbon one through green policy and taxonomy developments, said Moody’s Investor Service.

Scaling green and transition finance via sustainable instruments, including bonds and loans from the public sector, will further gain momentum as reporting standards and taxonomies improve, said the ratings agency in a report released on Monday (Feb 6).

Local taxonomy developments and the Asean taxonomy on sustainable finance would also encourage companies to promote carbon transition, as such frameworks provide clarity on what constitutes transition activities by classifying economic activities into green (environmentally sustainable), amber (transition) and red (harmful) categories.

During a virtual webinar on Monday, Moody’s sustainable finance analyst Young Kim said that the “traffic light” approach in the Asean taxonomy provides granularity to companies’ economic activities, and provides greater options for issuers that are looking to finance transition activities that also align with local taxonomies.

According to the Moody’s report, Asean was one of the few regions to buck the global declines in sustainable bond issuance volumes in 2022.

The region saw a 47 per cent increase in sustainable bond issuance last year, compared to 2021 – mainly due to sovereign entities and government agencies holding up the market due to weakness from corporate issuers, said Young.

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This includes the Philippines sustainability bond, Singapore’s first sovereign green bond, as well as those from the Republic’s Housing and Development Board, and issuances from Indonesia’s and Thailand’s governments.

Young says Asean has the potential for transition financing to take off, with many corporate’s economic activities being classified into transition. This, of course, depends on the region’s taxonomy developments, which are still in its early stages.

“The taxonomy will, overall, provide a general guideline for those corporates to provide a more long-term transition pathway when they are trying to align with their local taxonomies,” he added.

Across the entire Asia-Pacific region, the volume of sustainable bond issuance is expected to increase by 12.2 per cent to US$230 billion for 2023 from US$205 billion last year, driven by policy and regulatory focus on green and transition finance, said Moody’s

The amount raised, however, is still lower than the 2021 peak of US$260 billion.

While many governments in this region are taking steps to transition their economies, coal will still remain an important energy source. John Wang, senior analyst at Moody’s, pointed out that the absolute amount of carbon emissions is expected to increase in the next few decades among Asean countries due to their growth outlook.

“Governments in Asia that do not take into account the social implications of carbon transition face the risk of accelerating social inequalities and unemployment. So that will potentially lead to social unrest, of course, affecting credit quality,” said Wang. “So it will undermine trust in institutions and support for decarbonisation policies.”

“It will weaken the capacity of sovereigns to adjust and, ultimately, aggregating the credit implications of carbon transition,” he added.

Given that emerging markets would bear the brunt from the global push towards net zero, the increasing importance of addressing the socio-economic aspects of decarbonisation calls for a greater need for just transition financing initiatives in the region, noted the Moody’s report.

“As emerging markets start to play a bigger role in sustainable bond markets, mobilising climate finance through innovative solutions such as blended finance, loss and damage financing, and ramping up investment in adaptation and resilience measures will become important enablers to scaling up transition financing,” it read.

Citing data from the United Nations 2022 adaptation gap report, Wang said that the annual climate change adaptation cost is around developing countries in Asia is between US$50 billion and US$385 billion by 2030, and the gap between the amount needed and supplied is more than 10 times.

With governments of emerging markets often struggling with fiscal constraints, Moody’s said that this gap can potentially be filled by private sector participation, through support from external parties such as multilateral development banks with expertise in specific regions and the ability to allocate public and private capital efficiently through blended finance solutions.