South-east Asia’s ESG loans rebound 54.1% to US$9.4 billion in Q2

[SINGAPORE] Proceeds raised from environmental, social and governance (ESG) loans in South-east Asia rebounded sharply in the second quarter of 2026, jumping 54.1 per cent to US$9.4 billion, compared to Q1.

The Q2 figure represented a slight increase of 1.7 per cent year on year from US$9.2 billion, according to statistics from financial data provider LSEG.

Sustainable finance bankers told The Business Times that it would be difficult to attribute the recovery to the geopolitical effects from normalisation of the Iran war.

A peace deal was in the works between Iran and US towards the end of the second quarter, but that has largely collapsed since early July.

As for ESG bonds, proceeds increased 72.9 per cent to US$7 billion, from US$4 billion in Q1.

The Q2 number was almost three times that of US$1.8 billion in Q2 2025.

ESG loans

South-east Asia outperformed the wider ESG loan market.

Asia-Pacific region, excluding Japan, saw proceeds go up 26.1 per cent to US$26.7 billion, compared to US$21.2 billion in the previous quarter.

Globally, ESG loans dipped 2.5 per cent to US$183.2 billion from US$187.9 billion.

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The decline was even more pronounced on a year-on-year basis, where proceeds fell 22.6 per cent from US$236.6 billion. The Asia-Pacific excluding Japan region also saw a drop of 34.4 per cent from US$40.8 billion.

Adrian Ow, head of ESG strategy at UOB, said while the initial peace talks and partial reopening of shipping routes would have reduced certain immediate tail risks facing borrowers and lenders, many Q2 deals could have already been in the works before peace negotiations began.

“The increase likely reflects a combination of transaction timing, underlying financing needs and a temporary improvement in market confidence, rather than any single geopolitical factor,” he added.

Echoing similar sentiments, Mike Ng, OCBC’s group chief sustainability officer, said the rebound is more likely a resumption of financing and execution activity following a period of heightened uncertainty, rather than a direct response to geopolitical developments.

“Borrowers tend to adopt a wait-and-see approach during periods of heightened uncertainty, particularly as some sustainable financing transactions may require additional preparation and longer lead times,” he added.

“As market conditions stabilised, some borrowers may have proceeded with transactions that were already in the pipeline.”

Similarly, the bankers said transactions in Q2 may not necessarily reflect the rising urgency to shift to electrification and the use of renewable energy as a response to soaring energy prices due to the Iran war.

While OCBC continues to see financing demand for green data centres, renewable energy, electrification, energy-efficiency improvements and other transition-related investments, these are likely part of corporates’ longer-term strategies and capital expenditure plans, said Ng.

Nevertheless, Ow said the conflict has reinforced and sharpened the economic rationale for such investments, and corporates may have accelerated or reprioritised existing transition plans.

Given that the interim peace deal has been scuppered, and with fewer rate cuts being projected for the rest of the year, Ng said this may weigh on general borrowing appetites, project economic and transaction timing, thereby affecting the broader loan market, including ESG loans.

“Higher financing costs can be challenging for some renewable energy and transition projects because they are capital intensive and require substantial upfront investment,” he said.

“As a result, borrowers may become more selective and disciplined in sequencing and prioritising investments.”

Yet, delaying transition investments entirely could create longer-term risks, including regulatory exposure, stranded assets, energy-security vulnerabilities and potential loss of competitiveness.

Hence, Ng expects companies to focus on prioritising investments that deliver both decarbonisation and resilience benefits, while adopting a more scenario-based approach to planning amid continued uncertainty.

Ow said there may be greater differentiation within the market, where projects with clear cash flows, strong sponsors and an identifiable energy-security or cost-saving benefit are likely to continue attracting funds.

This is because governments and businesses across Asean are likely to have even stronger incentives to diversify energy sources, improve energy efficiency, strengthen electricity infrastructure and reduce reliance on volatile imported fuels.

However, transactions without an immediate commercial imperative or regulatory requirement could take longer to reach the market.

This could include more marginal projects that require additional credit enhancement, blended finance solutions, syndications or stronger contractual arrangements to improve bankability in a higher-cost funding environment, he added.

“We also expect borrowers to be more discerning on the quality of sustainable financing structures,” said Ow.

“With financing costs remaining elevated, companies will place greater emphasis on sustainability targets that are strategically material, internationally credible and operationally achievable, rather than metrics that sit separately from their core business plans.”

UOB was the top arranger for ESG loans in South-east Asia in the first half of 2026, with US$2.3 billion raised. OCBC came in second at US$2.1 billion, while DBS was third with US$1.7 billion.

ESG bonds

The rise in ESG bond proceeds from Asean issuers in Q2 2026 mirrors trends in the global ESG bond market.

Proceeds rose 21.3 per cent quarter on quarter to US$266.4 billion, from US$219.7 billion. On an annual basis, it rose 17.4 per cent from US$227 billion.

In Asia-Pacific excluding Japan, ESG bonds went up 45 per cent to US$54.7 billion from US$37.7 billion in the previous quarter. However, it fell 17.2 per cent year on year from US$66 billion.

Max Thomas, head of sustainable capital markets of Asia-Pacific at HSBC, said the recent pickup in ESG bond issuance in South-east Asia has been led by the more established sustainability markets, notably the Philippines and Singapore, where issuers are benefiting from supportive policy and financing backdrops.

Labelled debt is increasingly becoming part of the regular funding toolkit in South-east Asia.

He said it has evolved beyond just being a badge and is being used to “sharpen the transition and credit narrative, deepen investor engagement and provide greater transparency on how resilience and sustainability investments support long-term performance”.

Similar to the ESG loans market, the use of proceeds raised from these labelled bonds have been directed towards renewable energy and energy efficiency, said Rahul Sheth, managing director for debt capital markets and global head for sustainable bonds at Standard Chartered.

These investments are also driven by longer-term decarbonisation commitments, issuers’ sustainability strategies and national energy transition plans, rather than a direct response to the Iran war, he added.

Given the uncertain macroeconomic backdrop, issuers that need to raise funds are likely to remain highly agile to be able to readily access the market whenever conditions are supportive, said Sheth.

“In this environment, the ability to execute at short notice is increasingly important, particularly as market conditions are dynamic,” he added.

Despite these uncertainties, there are no signs of systemic liquidity stress in high-grade credit markets.

“We expect Asean ESG bond issuances to remain supported by a healthy pipeline of refinancing and funding needs, particularly across energy transition, sustainable infrastructure and social development projects,” said Sheth.

The top bookrunners for ESG bond deals in South-east Asia over the first half of 2026 were StanChart (US$2.2 billion), HSBC (US$863 million) and CIMB (US$815.6 million).