S-E Asia ESG bonds issuance falls for third straight quarter

CHALLENGING macroeconomic conditions dragged environmental, social and governance (ESG) bond issuance in South-east Asia to a 64.5 per cent year-on-year fall in the third quarter of 2023.

The US$2.3 billion of proceeds raised in the three months to Sep 30, 2023 was less than half the US$6.5 billion raises in the year-ago period, and marked the third straight quarter of year-on-year declines, based on data from Refinitiv.

ESG loans experienced a similar downtrend, with total loan amounts decreasing 46.2 per cent to US$6.5 billion in Q3 2023 compared to US$12.2 billion a year ago.

ESG bonds

The year-on-year decline in South-east Asian ESG bond proceeds – which include bonds labelled as green, social, sustainability and sustainability-linked – was steeper than in the rest of the world. Globally, ESG bond proceeds eased 5.5 per cent to US$145.2 billion in Q3 from US$153.7 billion a year ago.

In the Asia-Pacific excluding Japan region, ESG bond proceeds rose 9.7 per cent to US$29.9 billion from US$27.3 billion over the same period.

However, on a quarterly basis, South-east Asia’s performance is not that far off from other regions. ESG bond proceeds in South-east Asia fell 32.2 per cent from the previous quarter, which is similar to the 33.6 per cent decline globally. In Asia-Pacific excluding Japan, Q3 figures declined 48.3 per cent compared to the previous quarter.

Foo Tsiang Wei, head of corporate and investment banking at CIMB Singapore, said that South-east Asian bond markets continued to demonstrate relative resilience in Q3, even as the vast majority of central banks globally held their policy rates at multi-year highs during the quarter.

“The Asean local currency bond markets have historically provided ample depth, a sufficient liquidity pool as well as ease of market access,” Foo said.

Despite the US Federal Reserve’s somewhat hawkish interest rate stance, some central banks in emerging South-east Asia have been more accommodative. Hence, there were a handful of local-currency ESG bond issuances in Malaysia and Thailand over the quarter, he pointed out.

The Singapore government’s reoffer of its 50-year sovereign green bonds on Aug 24 surpassed pricing indications by 11 basis points, with a final price of 3.04 per cent. The offering comprised S$2.8 billion of bonds, on the back of a S$3.9 billion order book.

Still, these green bonds were just one out of two issued in South-east Asia for the third quarter, by Refinitiv’s count.

Overall, the high interest rate environment has not only increased costs of capital for ESG bond issuers, but also led to a decline in overall bond issuance volumes, Foo said.

The decline in deal volumes is also similarly observed in other investment banking products such as mergers and acquisitions, as well as in equity capital markets, he added.

Given the high volatilty in interest rates, Tan Kee Phong, head of capital markets for global investment banking at OCBC, said that issuers and investors have remained focused on short to medium-term tenures. This is why most corporate bonds issued in the past quarter, and over 2023 so far, have a tenure of between five and 10 years.

Among Singapore dollar-denominated bonds, Foo said recent new issuances have even tapped into shorter tenures of one, two and three years.

Over the first three quarters of 2023, total ESG bond proceeds have also fallen by 88.5 per cent to US$9.4 billion, compared to US$17.8 billion a year ago.

Analysts expect issuance volumes to recover once the United States Federal Reserve pivots from its rate hike cycle, and with companies accelerating their net-zero efforts.

The top bookrunners for ESG bond deals in South-east Asia over the first nine months of 2023 were CIMB Group Holdings (US$771.4 million), OCBC (US$657.6 million) and RBC Capital Markets (US$614.1 million).

In Asia ex-Japan, HSBC was the top bookrunner with US$6.9 billion. Bank of China came in second at US$6.3 billion and Citi was third with US$5.3 billion.

ESG loans

The 46.2 per cent year-on-year decline in ESG loans, which include green loans and sustainability-linked loans, in South-east Asia during Q3 mirrors the trend across the globe, which saw loan amounts drop by 59.5 per cent to US$67.6 billion, compared to US$167 billion a year ago.

Asia-Pacific excluding Japan experienced a slightly lower decline at 18.3 per cent to US$24.7 billion from US$30.3 billion over the same period.

Much like ESG bonds, the drop is a result of an overall decline in total loan volumes, including non-ESG loans.

Samuel Tan, head of loan financing at UOB, said that syndicated or club loan volumes declined by more than 50 per cent over the same period.

ESG loan volumes in the third quarter of 2022 were also the highest for at least the last three years, hence the decline looks more drastic in comparison, he added.

“So it is not that ESG loan volumes specifically have fallen, but overall loan volumes in the third quarter of 2023 have been weak given the high interest rate environment as well as the overall macroeconomic and geopolitical environment,” said Tan.

On a quarterly basis, proceeds from ESG loans in South-east Asia also went up by 51.3 per cent.

Over the first nine months of 2023, ESG loan amounts actually went up by 7.7 per cent to US$19.2 billion from US$17.9 billion over the same period last year. Tan pointed out that the year-to-date ESG loan volumes are at about 80 per cent of the total ESG loan amounts last year.

CIMB’s Foo said many corporate issuers were opting to refinance their debt maturities via loans instead of bonds, due to the reluctance to lock in fixed-rate financing at the present rates.

However, with interest rates remaining volatile, Tan said UOB is seeing more borrowers going for shorter tenures with the view that they can refinance through the bond markets, given that interest rates are expected to decline in the next two years.

“There are also borrowers that are exploring longer tenures as they look to loans as bond replacements in a high interest rate environment. The hawkish stance taken by the US Federal Reserve throughout 2023 – setting the expectation that rates would stay higher for longer – was a major driver behind this,” said Tan.

Banks are also willing to take on larger loans as bilateral facilities, rather than pursue syndicated or club facilities, to meet their own ESG lending growth targets, he added.

A DBS spokesperson said that the bank expects a gradual rebound in ESG loan activity going into 2024, in line with a growing emphasis on sustainable business practices and supply chains, and as investors become more confident as markets conditions stabilise.

As for Tan, he expects to see a wide range of ESG loans for the rest of 2023 and for 2024, including plain vanilla borrowings from corporates, financial institutions or state-owned enterprises, as well as transition financing deals, and more structured lending in the infrastructure space. 

Mizuho Financial Group was the top arranger for ESG loans in South-east Asia over the first three quarters of 2023, with US$1.7 billion raised. DBS came in second at US$1.2 billion. UOB was the top arranger for green loans in the region, at US$573.3 million.

MUFG topped the rankings for the Asia-Pacific ex-Japan region at US$3.1 billion. HSBC came in second at US$3 billion, and Hua Nan Financial was third at US$2.9 billion.