South-east Asia’s ESG bond proceeds rise for third straight quarter

PROCEEDS raised from environmental, social and governance (ESG) bonds in South-east Asia amounted to US$5.6 billion for the second quarter of 2024, rising 52.8 per cent from US$3.7 billion in the same quarter a year ago.

This marks the third straight quarter of year-on-year increases for ESG bonds in the region, after a tepid showing in 2023, according to data compiled by LSEG.

In contrast, ESG loans only increased marginally, rising 3.9 per cent to US$5.9 billion from US$5.7 billion over the same period.

ESG bonds

South-east Asia outperformed the global ESG bonds market, which saw proceeds decline 17.3 per cent to US$184.9 billion, from US$216.9 billion a year ago.

It also did better than the Asia-Pacific region excluding Japan, which saw proceeds dropping 33.3 per cent to US$39.5 billion from US$59.3 billion a year ago.

The jump in ESG bond proceeds in South-east Asia can be attributed to a few relatively large issuances from sovereign and quasi-sovereign entities in the region, said Rahul Sheth, global head of sustainable bonds at Standard Chartered Bank.

Accounting for close to half of the issuance for the quarter is the Monetary Authority of Singapore. The sovereign issuer had recently priced US$2.5 billion in green bonds with a tenure of 30 years at 3.3 per cent.

While there is a significant increase in issuances for Q2, Sheth pointed out that smaller changes can be magnified as a result of the base effect, given that the ESG bond market in South-east Asia is relatively small compared with other regions.

The data by LSEG seems to suggest that ESG bonds is increasingly becoming the preferred debt instrument for corporates to raise sustainable financing, as opposed to its loans counterpart.

Mike Ng, chief sustainability officer of OCBC Bank, said that loan costs may have risen to offset rising deposit costs, against persistently high interest rates.

Nonetheless, Sheth said that there are corporates here that have opted for loans to avoid higher fixed interest rates, which are more common in the bond markets. Loan agreements tend to have floating rates and a shorter tenure.

That being said, ESG bond markets is generally a better avenue for long-term funding, which is why it is dominated by issuances from sovereign and quasi-sovereign entities in the region.

Sheth foresees sustained interest from corporates in this region to tap into the ESG bond market, including those with new or updated sustainable finance frameworks, as well as issues which have adopted ESG-labelled financing as a core component of their wider funding strategy.

More issuers are expected to enter the market in Q3 to front-load their issuances for the second half of the year. This is to anticipate a possible rise in volatility in the financial and credit markets as the United States heads for its presidential election in November.

The top bookrunners for ESG bond deals in South-east Asia over H1 2024 were StanChart (US$2 billion), HSBC (US$1.4 billion) and Citi (US$1.1 billion).

ESG loans

The marginal increase in ESG loan issuances in South-east Asia is in line with the wider Asia-Pacific region, which saw proceeds rise 8.2 per cent to US$22.3 billion from US$20.6 billion a year ago.

Both regions did better than the global ESG loans market, where issuances fell to US$148.2 billion, an 18.9 per cent drop from US$182.7 billion.

Ng said that South-east Asia’s outperformance is a reflection of banks and investors actively engaging with corporates on ESG matters. This includes small and medium-sized enterprises (SME), which are facing pressure from their value chains to transition to a less carbon-intensive business model. This is even though SMEs generally tend to have fewer resources to start their sustainability journey.

“Financiers, both investors and banks, are stepping up efforts to work with companies on their sustainability ambitions, including decarbonisation... As more banks step up their efforts to reduce their financed emissions, corporates will also face increasing pressure to transition their business activities and take up green and transition financing to support their transition activities,” he added.

Other factors contributing to the region’s outperformance include economic growth, policy shifts, private sector activity and consumer pressure, which help to create significant tailwinds for sustainable development, said Lim Wee Seng, group head of sustainability for strategic advisory, project finance and energy, renewables and infrastructure at DBS.

He added that the bank is seeing increasing demand for investments into various sectors including energy, renewables and infrastructure, as well as real estate.  

Ng expects to see continued growth in ESG loans in the region, as more banks and businesses are embarking on net-zero commitments and embedding ESG considerations in their business.

“Governments in the region are also introducing sustainable finance taxonomies, giving more confidence to banks and investors to offer green or transition financing for the wider group of industries,” he added.

Lim said that there is also a broader shift in the market towards a growing emphasis on transition financing, alongside green financing, to enable decarbonisation in the real economy.

“Increasing investor and borrower awareness of ESG opportunities will continue to drive the ESG loan market in the region,” he said.

OCBC was the top arranger for ESG loans in South-east Asia in H1, with US$2.6 billion raised. DBS came in second at US$1.6 billion. Sumitomo Mitsui was third with US$1.4 billion raised.