S-E Asia ESG debt issuance lags global pace to fall for second straight quarter

ENVIRONMENTAL, social and governance (ESG) bond proceeds in South-east Asia shrank 37.8 per cent year on year to US$3.2 billion in the second quarter of 2023, in line with a wider downturn across debt markets due to high interest rates and economic uncertainty.

It was the second straight quarter of year-on-year decline, based on data from Refinitiv.

A similar downtrend hit ESG loans, with Q2 2023 loan amounts decreasing 22.5 per cent to US$3.7 billion from US$4.7 billion a year ago, the data showed.

Bankers pointed out that the decline comes amid an overall drop in bond and loan issuances, including non-ESG financing instruments, as global macroeconomic factors such as rising inflation and interest-rate hikes increased the costs of capital.

Foo Tsiang Wei, head of corporate and investment banking at CIMB Singapore, said about US$45.3 billion of proceeds have been raised through ESG and non-ESG local-currency bond issuances across South-east Asia since the beginning of 2023. This is about a 33 per cent decline compared to the same period in 2022.

ESG bonds

The year-on-year decline placed South-east Asia behind other regions in terms of new issuance.

Global ESG bond proceeds in the second quarter rose 10.2 per cent to US$211.1 billion from US$191.6 billion. In Asia-Pacific excluding Japan, the amount raised through ESG bonds increased by 14.8 per cent to US$50.5 billion from US$44 billion. 

Besides macroeconomic factors such as rising inflation and interest-rate hikes, the drop in South-east Asia was also attributed to lower funding needs by traditional issuers.

Agata Raszkiewicz, managing director and head of South-east Asia debt capital markets at Deutsche Bank, noted that Indonesia nearly halved its sovereign-bond issuance plan in a recent announcement.

“Several corporate borrowers are reassessing their investment plans in light of higher costs,” she said.

Foo also said that heightened market volatility and cautious market sentiment, especially over Additional Tier-1 debt in the wake of the Credit Suisse collapse, could have led to lower regulatory capital issuances by regional financial institutions in South-east Asia.

There are also a number of issuers opting to refinance their debt maturities through loans instead of bonds, as they are reluctant to lock in a fixed rate of financing given that interest rates are likely at their peak, he noted. 

That is because loans provide issuers with more flexibility to enter into interest-rate hedging, or to prepay early when rates come off their peak.

Raszkiewicz said there are good levels of liquidity onshore in a number of Asean jurisdictions across both bank and bond markets.

This is because many issuers that traditionally would have borrowed in US dollars are choosing to do so in their home currency when comparing costs and the availability of funding onshore and offshore.

Use-of-proceeds bonds – which allow proceeds to be used only for activities that achieve green or social outcomes – continued to drive issuance. Green bonds remain the most popular labelled financing instrument, making up almost half of all ESG bond issuances in Asean with US$1.6 billion. Social bonds are still playing catch-up, with US$1.4 billion raised in Q2 2023.

However, sustainability-linked bond (SLB) deals have dried up, with no new issuance over two consecutive quarters.

Unlike use-of-proceeds bonds, the sustainability-linked structure does not restrict how the proceeds are used, instead requiring issuers to pay a higher interest rate if they fail to meet sustainability targets.

Raszkiewicz noted that SLBs are a relatively newer financing instrument compared to use-of-proceeds bonds, and are more difficult to structure to ensure alignment with international climate goals.

Foo said the SLB bond market in South-east Asia is still in a nascent stage, compared to use-of-proceeds bonds.

While many issuers might already have frameworks for use-of-proceeds bonds, fewer have laid down the foundations to use the sustainability-linked structure.

“We expect issuer clients to be more receptive to issuing SLBs and observe a number of issuer clients updating their bond frameworks in 2023, in order to be deal-ready for the issuance of both green, social, sustainability bonds, as well as SLBs when macroeconomic conditions turn favourable,” he said. 

Overall, bankers expect the volume of labelled bond issuances in Asean in the latter half of 2023 to increase, in line with expectations that the US central bank will begin to temper its rate-raising stance.

Raszkiewicz said that Deutche Bank expects the rate-hike cycle to end after one more increase in July.

“With stabilisation in Federal Reserve rates accompanied by very low levels of supply, we expect primary activity to start picking up in late 2023 and early 2024. A large portion of this issuance will be ESG-labelled, as focus on transition and sustainability remains one of the key themes over the coming years,” she said.

With the latest US consumer price data showing that inflation rose only 0.2 per cent in June, Foo said there is stronger conviction that the next one or two rate hikes, which would come by the end of 2023, would be the last in the current cycle.

“As several issuers have pushed back their issuance plans due to uncertainty in (the) interest-rate trajectory, we expect issuances for both ESG and non-ESG bonds to make their way back in the remaining months of 2023,” he said.

The top bookrunners for ESG bond deals in South-east Asia during the quarter were RBC Capital Markets (US$614.1 million), CIMB Bank (US$531.6 million) and Deutsche Bank (US$376.4 million).

In Asia ex-Japan, HSBC was the top bookrunner with US$4.8 billion. BNP Paribas came in second at US$3.6 billion, and Bank of China third at US$3.4 billion.

ESG loans

The slowdown in ESG loans in South-east Asia mirrored a global downturn.

Globally, US$159.5 billion in ESG loans were raised in Q2 2023, a 27.7 per cent decrease from the US$220.7 billion raised in the same quarter a year ago. The drop was even more pronounced in Asia Pacific-ex Japan, with ESG loans declining 44.7 per cent to US$17.5 billion from US$31.7 billion a year ago.

Unlike its bond counterpart, the sustainability-linked structure for loans is proving to be more popular than conventional green loans.

Sustainability-linked loans made up close to 80 per cent of all ESG loans in South-east Asia in Q2 2023, with US$2.9 billion raised, down 5.7 per cent year on year. Combined with a strong first quarter, however, the first half of 2023 tripled from the year-ago period to US$10.4 billion.

Amanpreet Singh, deputy head for ESG finance Asia-Pacific for MUFG, said there is an increased interest in sustainability-linked debt in South-east Asia.

Shailesh Venkatraman, managing director and head of origination for South and South-east Asia’s debt capital markets at MUFG, said that the focus on ESG has remained steadfast despite the drop in debt market volumes across loans and bonds to multi-year lows.

“Whether or not a financing carries a green or social label, the need for borrowers to articulate their ESG strategy, or at least address queries from investors on ESG aspects of the business, has become integral to any fundraising exercise,” he said.

Mizuho Financial Group was the top arranger for ESG loans in South-east Asia in the second quarter of 2023, with US$1.3 billion raised. MUFG came in second at US$951.7 million.

But MUFG topped the ranking for the Asia-Pacific ex-Japan region at US$2.2 billion. Hua Nan Financial Holdings came in second at US$2.1 billion, and First Financial Holding is third at US$2 billion.