Transition finance in South-east Asia expected to grow in 2026, say market watchers

[SINGAPORE] Transition finance is expected to grow in South-east Asia in 2026, following the release of international frameworks on how financing tagged with a sustainability label can be used by carbon-intensive sectors to facilitate their decarbonisation.

Late last year, the Loan Market Association published a guide on structuring transition loans aligned with net-zero pathways, while the International Capital Market Association released a similar tool for the issuance of transition bonds.

These guidelines are a “meaningful step forward” for Asian issuers, said Max Thomas, head of sustainable capital markets for Asia-Pacific at HSBC.

“The guidelines bring greater clarity on disclosures around transition strategy as well as addressing potential limitations or challenges to execution, providing a more holistic perspective to investors,” he added.

Sustainable finance proceeds raised in South-east Asia remained flat in 2025, compared with the previous year, based on data provided by LSEG.

Proceeds from environmental, social and governance (ESG) bonds came in at US$20.3 billion for the year, marginally higher than US$20.2 billion in 2024, as markets were hit with heightened risks and volatility due to tariffs imposed by the United States.

ESG loans slipped 0.8 per cent year on year to US$43 billion, from US$43.3 billion.

What to expect in 2026

While transition finance is not new, its growth has been stymied by the lack of standards and taxonomies that defines credible transition. Sustainable finance taxonomies set criteria and thresholds for a range of economic activities that would be considered eligible for sustainable and transition financing.

Whether in the form of bonds or loans, transition finance has generally lagged behind its more common variants, such as green or sustainability-linked financing. Yet, hard-to-abate sectors have generally found it difficult to tap green financing as their carbon-intensive businesses do not meet the requirements.

That may soon change with the release of these two new international frameworks on transition finance.

In addition, the Singapore Sustainable Finance Association had also released additional guidance on how the Singapore-Asia Taxonomy can be leveraged for transition financing.

“Ongoing efforts to refine sustainable finance taxonomies, including the Singapore-Asia Taxonomy, for real-world usability will hopefully drive growth in this area,” said Jeong Yoonmee, head of global wholesale banking sustainability office at OCBC.

However, while transition bond and loan volumes are expected to grow, the lack of alignment across frameworks may still constrain volumes, said Martijn Hoogerwerf, head of sustainable solutions group for Asia-Pacific at ING.

“The market will closely watch upcoming issuances and how global taxonomies and standards are applied,” he added.

Besides transition finance, Hoogerwerf said social bonds, which are meant for projects that have a positive social outcome, could be on the rise as a result of financing the micro, as well as small and medium enterprises in South-east Asia.

HSBC’s Thomas said that blue bonds, where proceeds raised are used for marine and ocean-based projects, is expected to gain traction in 2026 given the region’s exposure to coastal risk, marine ecosystems and water security.

While not considered traditional sustainable finance, the financing for digital infrastructure, including data centres and connectivity projects, could also be picking up steam this year.

Thomas noted the rise in thematic bonds issuance, which follow similar disclosure requirements on the use of proceeds and strategic intent as conventional sustainable finance, but are not tagged with a sustainability label.

Instead, issuers are using labels that signal alignment with long-term priorities or around evolving market themes, such as the recent artificial intelligence bond by Korea Export-Import Bank.

“(This year) is likely to be defined less by new labels and more by higher-quality disclosure, credible transition pathways and financing structures that reflect the region’s unique climate, economic and development realities,” he added.

ESG bonds

While ESG bond issuance in South-east Asia was relatively flat year on year, the wider Asia-Pacific region (excluding Japan) performed better, with proceeds growing 21.7 per cent to US$209.9 billion, according to LSEG.

It outperformed the global market, which saw funds raised increasing by a slight 2.6 per cent to US$800.2 billion.

While sentiment was muted at the beginning of last year due to geopolitical uncertainties and the polarisation of ESG, Hoogerwerf said that the sustainable finance market still remains resilient.

Corporates and financial institutions in Asia-Pacific remain committed to tapping sustainable finance channels, and issuers are increasingly focused on executing climate action plans, which translates into capital expenditure needs and financing requirements.

Even though tariffs, in addition to the rolling back of climate policies in US, has contributed to global uncertainties, the impact on South-east Asian corporate ESG sentiment appears limited, said Hoogerwerf.

“Regional issuers are more influenced by local regulatory frameworks, investor demand and their own transition strategies than by US domestic policy shifts,” he added.

Going forward, sustainable professionals expect ESG bond issuance volumes in 2026 to remain in line with last year’s, or experience a modest uptick, at best.

There will be a rise in redemption volumes of these bonds this year compared to the last two years, which creates refinancing opportunities.

Sustainability remains central to decision-making among investors and issuers in this region, and corporates have transition strategies, which will drive financing towards implementation, said Hoogerwerf.

Thomas added that issuers are continually investing into projects with positive social and environmental impacts, which grows the number of eligible assets to allocate to new green bonds.

International investors’ interest in South-east Asia’s ESG bonds are expected to remain robust, he added.

“However, it is important for South-east Asian issuers to disclose impact reports which are increasingly a hygiene expectation from global investors,” said Thomas.

In 2025, the top bookrunners for ESG bond deals in South-east Asia were ING (US$2.2 billion), HSBC (US$1.6 billion) and CIMB (US$1.5 billion).

ESG loans

ESG loans in South-east Asia largely tracked the global market, which fell 2 per cent to US$699.8 billion.

However, the Asia-Pacific region (excluding Japan) did better, with proceeds rising 11.5 per cent to US$138.4 billion.

Despite the volatility in the first half of 2025, the underlying momentum of sustainable financing in the region remained strong, driven by demand for renewable power, greener infrastructure and more resilient supply chains, said Shilpa Gulrajani, head of sustainable finance for the institutional banking group at DBS.

While corporates in South-east Asia adopted a “wait-and-see” approach amid geopolitical tensions and macroeconomic uncertainties, OCBC’s Jeong said the momentum of investments in environmentally responsible projects across the region eventually held up, with greater clarity around tariffs and with the support of Asean governments for green policies and infrastructure.

“We are also seeing a growing diversity of sectors embedding sustainability into their operations. The emerging sectors include data centres, telecommunications and chemicals, beyond traditional areas like energy, utilities and real estate,” added Jeong.

She expects ESG loan volumes this year to remain broadly consistent with 2025, as it would largely track broader loan market trends and is reflecting a stable but mature market.

As the sustainable finance market evolves with a clear shift towards quality over quantity, Jeong said that there may not be significant growth in labelled sustainable finance, although this does not necessarily imply reduced investments in green and transition technologies or waning corporate interest in sustainability.

“Macroeconomic conditions and geopolitical developments will continue to influence sentiment and shape corporates’ sustainability priorities relative to other strategic objectives,” she added.

“There is also growing recognition that sustainable and transition finance needs to be pragmatic and impactful, driving real economy decarbonisation rather than focusing solely on labelled instruments.”

DBS’ Gulrajani said that structural growth across the region will continue to drive sustainable financing as companies transform their businesses and transition towards lower-carbon operations. 

Some of the drivers include meeting growing demand from data centres, renewables and energy storage as a result of the need to strengthen energy security. Supply chain and infrastructure resilience are also emerging themes, she added.

OCBC was the top arranger for ESG loans in South-east Asia in 2025, with US$4.6 billion raised. DBS came second at US$4 billion and UOB was third with US$3 billion.