South-east Asia’s ESG bond proceeds jump 80% in Q3 2024 with new and existing issuers entering the market

ENVIRONMENTAL, social and governance (ESG) bond issuances in South-east Asia continued to rise through 2024 with the third quarter showing a sharp jump from the previous year.

Proceeds raised from these bonds that come with a sustainable label rose to US$5.2 billion for the quarter ending Sep 30, an 80 per cent increase from US$2.9 billion in the same period a year ago, according to data compiled by LSEG.

This marks the fourth straight quarter of year-on-year increase for ESG bonds in the region, after a tepid showing in 2023.

The amount of money raised for each quarter over the first nine months of 2024 have also maintained at over US$5 billion.

In contrast, the supply of ESG loans declined in South-east Asia, with proceeds declining 9 per cent to US$11.1 billion in Q3 2024, from US$12.1 billion in the same period a year ago.

ESG bonds

South-east Asia’s ESG bond issuances outperformed both the global market and Asia-Pacific.

Globally, US$202.9 billion of funds from ESG-labelled bonds were raised, a 37.1 per cent increase from US$158 billion in the same period a year ago.

Asia-Pacific tracked closely, with issuances rising 33.8 per cent to US$44.2 billion, compared to US$33 billion a year ago.

While the outperformance of South-east Asia was partly attributed to the base effect as a result of its small market, there is a wider spectrum of new and returning issuers accessing the market, noted Rahul Sheth, global head of sustainable bonds at StanChart.

Bolstering ESG volumes in Q3 were financial institutions, which had more issuances compared with the same quarter last year, he noted. This included a social bond issued by Muangthai Capital and a sustainability bond from the Bank of Philippines Islands, which had not issued an ESG-labelled bond in almost five years.

There were also a few unique transactions among corporates. This included Indonesia’s first rupiah-denominated sustainability-linked bonds by PT Steep Pipe Industry, which was guaranteed by Credit Guarantee and Investment Facility – a trust fund of the Asian Development Bank.

Indonesian geothermal company Sorik Marapi Geothermal Power also sold a US-dollar-denominated high-yield secure green bond, while Thai hospitality company Minor International offered a baht-denominated sustainability-linked bond.

Singapore’s property player CapitaLand Investment also issued the second tranche of its sustainability-linked panda bond.

The role of sovereign issuers, once again, featured strongly in the region. Singapore’s Housing and Development Board, its national water agency PUB, as well as its central bank were among some of the sovereign issuers for the quarter.

Indonesia and the Philippines were other sovereign issuers that contributed to the volume, with their return to international capital markets with sustainability bonds, noted Sheth.

While ESG bond issuances are typically driven by green bonds – which refer to bonds where proceeds raised may be used to fund only projects that have positive environmental impacts – the bigger contributor to this quarter’s proceeds were sustainability bonds.

These are bonds that finance projects with a mix of both green and social objectives.

About US$2.3 billion of proceeds were raised from sustainability bonds in South-east Asia, way above the US$164.9 million raised in Q3 2023.

In contrast, green bonds only came in at US$1.3 billion for the region, declining by 51.7 per cent from US$2.6 billion a year ago.

The sustainability bonds for the quarter were mainly issued by the Philippines – both from its financial institutions and the government, noted Sean Henderson, co-head of debt capital markets in Asia-Pacific at HSBC.

This reflects a trend among financial institutions and sovereign issuers of presenting a wider and fuller sustainability proposition instead of only focusing on climate, he added.

As for sustainability-linked bonds (SLBs), Sheth said that there is notable interest in such structures among South-east Asian issuers, even though the issuance volume remains relatively small. SLBs are debt instruments where the coupon payment is linked to whether the issuer has achieved its sustainability key performance indicators.

In South-east Asia, proceeds from SLBs came up to US$498.8 million.

Sheth said that the continued interest in SLBs are a result of greater awareness and understanding among issuers on its requirements, as well as greater availability of sustainability-related data – through more ESG disclosures – on which to base SLB targets.

“A good number of the SLB issuers have previously borrowed in the sustainability-linked loan format, which results in them having a good understanding of the structure, as well as having set up the internal process to monitor and report on sustainability-related data. This serves as a robust groundwork to prepare for an SLB issuance,” he added.

Going forward, ESG bond activity is set to quieten down in the last quarter of the year, said Sheth. On top of it being a typically quiet period, markets are also taking a “wait-and-see” approach  following the outcome of the United States’ elections, which saw the return of former president Donald Trump – a well-known climate sceptic.

Nonetheless, there is still a healthy pipeline of issuances, including the first ever sovereign sustainability-linked bond in South-east Asia to be issued by Thailand, which is expected to price in Q4 2024.

The top bookrunners for ESG bond deals in South-east Asia over the first nine months of 2024 were StanChart (US$3.1 billion), HSBC (US$1.5 billion) and Citi (US$1.4 billion).

ESG loans

With South-east Asia’s ESG loan issuances in Q3 2024 down 9 per cent from the same period a year ago, it underperformed the global market, which saw proceeds rise 22.3 per cent to US$120.9 billion from US$98.8 billion over the same period.

However, the region still did better than the wider Asia-Pacific, with ESG loan supply declining to US$21.9 billion, a 36.8 per cent drop from US$34.6 billion over the same period.

The slowdown in ESG loan issuances could be due to businesses preferring to let interest rates settle before entering the market, with expectations that interest rates will be trending downwards since the beginning of the year, said Lim Lay Wah, head of global financial institutions group and sector solutions group at UOB.

This is a spillover effect from an overall slowdown in the wider loan market in the region, rather than reduced confidence in ESG loans, said Mike Ng, chief sustainability officer at OCBC. 

“Another trend we observe is that sustainable financing is becoming business-as-usual for leading companies, and hence many may not publish such data on their sustainable finance transactions publicly,” he added.

Bankers are optimistic that the ESG loans market in South-east Asia will continue to grow.

“With interest rates getting priced in, we expect clients to take advantage of the lower interest rate environment to secure financing for their projects and initiatives or refinance existing loans,” said Lim.

Besides interest rate effects, regulatory expectations for corporates to make sustainability disclosures will inevitably require them to address and adopt sustainability and transition drivers, said Ng.

In addition, as financial institutions have to reduce their own financed emissions, corporates will also face increasing pressure to transition their business activities to be less carbon-intensive, leading them to take up green and transition financing to support their transition activities, he added.

“As the momentum towards net-zero accelerates, substantial investments in green and transition economic activities will be needed, particularly in Asean where there are significant opportunities to transition hard-to-abate economic activities to green,” said Ng.

OCBC was the top arranger for ESG loans in South-east Asia across the first nine months of 2024, with US$4.2 billion raised. UOB came in second at US$4 billion, while DBS was third with US$3.4 billion raised.