Rising rates drag SE-Asian ESG bond volumes down 36% in Q1 2023, but sustainable loans grow

PROCEEDS raised from environmental, social and governance (ESG) bonds in South-east Asia fell 35.7 per cent year-on-year to US$4 billion in the first quarter of 2023 as rising interest rates stirred up market volatility.

The region lagged the rest of the world, with global issuance growing 4.2 per cent to US$229.9 billion, according to data from financial data provider Refinitiv. In Asia excluding Japan, ESG bond proceeds declined 5.8 per cent to US$42 billion over the same period.

On a quarter-by-quarter basis, South-east Asian ESG bond proceeds rose 40.3 per cent from the last quarter of 2022 but still trailed the rest of the world. Quarterly growth was 77.1 per cent globally and 46.1 per cent in Asia ex-Japan.

Agata Raszkiewicz, managing director of Deutsche Bank and head of South-east Asia debt capital markets, said the quarter-on-quarter improvement reflected peak volatility in the last three months of 2022. December also tends to be a quieter month for issuance due to global holidays.

Bankers told The Business Times that they expect momentum for sustainable financing in South-east Asia to bounce back, with support from sovereign issuers.

Puja Shah, head of ESG debt capital markets for Asia ex-Japan at JP Morgan, said that the continued ESG issuance by most sovereigns in South-east Asia, as they push to meet net-zero goals, will encourage greater ESG adoption and will support clean infrastructure rollout. 

“In addition, banks across the region have further developed green financing agendas, with many signing up to the net-zero banking alliance climate initiative, which we expect will further boost the ESG financing markets,” she said.

Kamran Khan, head of ESG for Asia-Pacific at Deutsche Bank, said that ESG bond deals are not immune to slowdown caused by macroeconomic factors in the broader capital markets. 

He added that issuers are keen to structure ESG-compliant instruments to make their transactions more attractive to investors in an environment where fewer deals are being priced. 

“We expect ESG bond deals to bounce back as macroeconomic conditions stabilise and capital market activity picks up.  We expect ESG bonds to continue to pick market share from traditional bonds going forward,” he said.

Green bonds remained the structure of choice, with South-east Asia volumes increasing 9.9 per cent from the year-ago period to US$805.2 million.

Bankers told BT that investors generally prefer shorter bond tenors due to market volatility. Shah observed that the sweet spot for issuance is in the intermediate tenors of between five and 10 years.

That being said, Raszkiewicz noted that ESG bonds have generally witnessed better execution, with issuers able to tap longer tenors and exert better pricing leverage.

The top bookrunners for ESG bond deals in South-east Asia during the quarter were Deutsche Bank (US$376.4 million), RBC Capital Markets (US$359.1 million) and JP Morgan (US$359.1 million). 

Topping the rankings globally were BNP Paribas (US$16.8 billion), Bank of America Securities (US$12.8 billion) and HSBC (US$12.3 billion). 

ESG loans

In contrast to the bond segment, South-east Asian sustainable loan volumes reached US$7.9 billion, more than eight times the year-ago amount of S$962.8 million.

This bucked the global trend, which saw proceeds from green and sustainability-linked loans decreasing by 60.1 per cent to US$87.9 billion over the same period. For Asia ex-Japan, ESG loan proceeds eased 2.7 per cent to US$19.3 billion. 

On a quarterly basis, South-east Asia continued to be an outlier, with ESG loan proceeds increasing by 32.9 per cent. Globally, it was down by 48.3 per cent, with a similar drop of 49.2 per cent for Asia ex-Japan.

The sustainability-linked structure seems to be the preferred ESG loan option among corporates globally and in Asia.

Amanpreet Singh, deputy head for ESG finance Asia-Pacific for MUFG, attributed the structure’s popularity to the flexibility that it accords corporates with regards to the use of proceeds.

Corporates’ net-zero commitments are also translating into specific targets and initiatives that can be integrated into the sustainability-linked loan market, he added. 

With the State Bank of India recently closing a US$1 billion social loan facility, and HDFC bank signing a US$1.1 billion social in August last year, Singh said this is expected to increase interest in social loans in the Asia-Pacific region, and especially in South-east Asia, where the concept of a “just transition” is gaining traction. 

MUFG was the top arranger for ESG loans in South-east Asia in the first quarter of 2023, with US$838.9 million raised. Mizuho came in second at US$588.9 million.

MUFG also topped the ranking for the Asia ex-Japan region at US$1.7 billion. HSBC came in second at US$1.2 billion, and Bank of China is third at US$919 million.

Globally, the top arrangers were Mizuho (US$8.9 billion), MUFG (US$6 billion) and BNP Paribas (US$4.6 billion).