Issuers’ ESG strategy more important to investors than the label of their bonds: Barclays
INVESTORS are likely to focus more on a bond issuer’s environmental, social and governance (ESG) strategies in 2023, rather than whether the bonds simply have an ESG label attached to it, said Barclays in a credit research report.
This tendency to focus on ESG strategies rather than the bond label in Asia stands in contrast to Barclays’ expectations of an expanding green premium in European credit markets due to upcoming regulations encouraging holdings of “use of proceeds” instruments. Green premiums refer to an ESG bond issuer’s lower cost of financing.
The Asian preference will contribute to the importance of ESG factors and developments in the region’s credit markets, instead of bond labelling – which has been the main driver of green premiums.
The authors of the Barclays report, which was released on Monday (Jan 30), found that these green premiums – or “greeniums” as termed by the market – narrowed sharply in Asia’s credit markets to 15 basis points (bps), after hovering between 30 and 40 bps for most of last year.
“This may be partly due to portfolio adjustments in favour of more liquidity and shorter duration amid a rapidly shifting macro backdrop,” said the report.
However, the authors also noted that pricing greenium in Asia is a complicated exercise. One reason is that the smaller size of labelled bonds could imply weaker trading liquidity.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
ESG bonds
Barclays expects the volume of new ESG bond issuances among corporates to decline structurally in 2023 in Asia markets as Chinese issuers stay on the sidelines. This could mean that the Asia ESG bond market may struggle to grow this year.
It expects total bond supply to come in at between US$150 billion and US$180 billion for the year, with ESG-labelled bonds stabilising at between 30 and 40 per cent of total Asia volumes.
South Korea, India and Indonesia should continue to lead the league tables as the issuer mix broadens across financial institutions, government entities and corporates.
“We expect other geographies like the Philippines, Thailand and Malaysia to become an emerging source of new deals, but volumes are likely to remain low,” the report said.
“For sovereigns, we expect Asian economies to increasingly focus on ESG taxonomies and financing platforms in the domestic markets, resulting in greater issuance of sovereign-labelled bonds to set benchmarks and create liquidity in that market,” it noted.
For 2022, the volume of ESG bond issuances fell for the first time, in line with the contraction in overall bond supply. Asia’s share of global ESG bond issuance was 17 per cent in 2022, below the 20 per cent level reached in 2016, when the market was still in its infancy.
ESG funds
Citing data from fund flows data provider EPFR, Asia-Pacific ESG funds – including both equity and fixed income – recorded a net inflow of 15 per cent during 2022, compared with a 4 per cent net inflow globally.
This helped the region gain a further share of the total global ESG funds – from 2 per cent at the end of 2020 to 4 per cent at the end of 2022.
“The relative performance reflects the stronger investor appetite for sustainable investing in the region,” noted the Barclays report.
A separate report by financial services company Morningstar noted net outflows of US$22 million in ESG funds in the Asia region, excluding Japan and China, for the fourth quarter of 2022.
Japan also recorded net outflows of US$557 million for the quarter. Among Asia-Pacific markets, Australia and New Zealand were the only countries which saw the sustainable-funds universe bounce back, with ESG fund inflows increasing four times from the previous quarter to US$1.6 billion in the last quarter of 2022.
Globally, ESG funds attracted almost US$37 billion of net new money in 2022 Q4. These inflows were 50 per cent higher than the revised US$24.5 billion of the third quarter, but they were only felt in Europe, Canada and Australia.
Copyright SPH Media. All rights reserved.
