In the last decade green finance has been on the uprise. In particular, green bonds and climate bonds demonstrate significant market share growth and represent an important opportunity for investment.
In the last decade green finance has been on the uprise. In particular, green bonds and climate bonds demonstrate significant market share growth and represent an important opportunity for investment.
The value of green bond issuance in 2018 increased from approximately USD168 billion dollars compared to 162 billion in 2017. Asia-Pacific has the largest growth rate amongst all the other countries in green bond issuance and China has captured over 18% of the market share according to Carbon Care Asia.
The 2018 Green Bond Market in Numbers
*Source: Green bonds the state of the market 2018, Climate Bonds Initiative (2019)
In 2018, the climate-aligned bond universe was worth over $1.45 trillion US dollars.
General Overview of Climate-Aligned Universe
*Source: Green bonds the state of the market 2018, Climate Bonds Initiative (2019) and Bonds and Climate Change The state of the Market 2018
Climate-aligned issuers are entities which generate at least 75% of their revenues from business lines involved in green activities. The Climate Bond Initiative (CBI) defines fully-aligned issuers with 95% or more green revenues, and strongly-aligned issuers with 75%-95% green revenues.
In reference to the graph above, China is in the lead for 2018 for strongly aligned climate bonds.
So How Can Asian Companies Create Value?
Investors clearly have a growing appetite for sustainable investments in general.In 2016, over $22.9 trillion of global investments were oriented toward Environmental, Social and Governance (ESG) policies.
Asian companies should leverage their ESG performance to capture the fruitful opportunities derived from this rising trend. In fact, sustainability-linked loans give a financial incentive to companies who are interested in improving their ESG performance.
Attracting New Investors with Better ESG Performance
It is postulated that organisations should issue green bonds in the market to attract new investors by improving their ESG performance. In the following, we outline important factors for improved ESG performance.
#1. Green Credentials
The issuer should clearly define the use of proceeds for the project categories it intends to support. Environmental benefits from the financed project(s) should be made clear.
A transparent solution to this is Green Bond Taxonomy. It is a list of eligible assets with thresholds and metrics, providing clear guidance to both issuers and investors.
#2. Transparency
Proceeds should be transferred to a sub-portfolio or undergo a formal internal process that should be disclosed. For example, ICBC's Green Bond Framework is used as a plan to issue green bonds, to finance and refinance eligible green assets that encourage low-carbon initiatives and sustainable, environmentally beneficial economies.
Below are two examples of ICBC's green asset categories:
- Energy Efficiency
Improved efficiency levels in delivery of mass energy services. Includes smart grids, transmissions and district heating and cooling systems. Products or technologies that are focused on reducing energy consumption levels from existing assets, systems, technology and even products. Includes improved lighting technology such as LED lights, improved cooling systems, or even reduced voltage from manufacturing operations
- Sustainable Water and Wastewater Management
Ranges from water treatment facilities, recycling, collection method and related technologies. Includes dams, plant facilities, water pipes and collection facilities
#3. Governance
The process behind the investment decisions should be made clear by the issuer to determine the validity of individual investments using the Green Bond’s proceeds.For the project evaluation and selection process, eligible green assets will be initially sought out and proposed by the bank’s departments globally including the subsidiaries and branches.
After this, they will be reviewed by a green bond team at the bank’s head office i.e.The Green Bond Working Group which consists of members from many departments.
#1 The Green Bond Working Group will review all proposed eligible assets
#2 Eligibility criteria is reviewed in compliance with bank's green bond framework
#3 Approval is granted for each "Eligible Green Asset"
#4 An "Eligible Green Asset List" is formed
#4. Environmental Benefits
In ICBC's Annual Green Bond Report in 2017, green bonds were said to reduce a total of 'CO2 emissions of 4.1 million tons per year, including 2.7 million tons per year for renewable energy assets and 1.46 million tons per year for low-carbon and low-emission transportation.'
Therefore it can be deducted that reporting is an important element to demonstrate the environmental benefits that occur due to the proceeds. Reports should be issued by the issuer at least once a year.
Market Insight: The Future of Green Investments
The frequent occurrence of natural disasters caused by rising temperatures causes billion dollars in financial loss and forcing people into poverty. Economies need to be more resilient and reposition themselves into a more progressive, sustainable and low-carbon emitting entity. Climate-smart investments such as green and climate bonds are a growing market and ever-growing opportunities.
However, the gap between developed and developing countries still persist. Few banks in developing countries issue green bonds. Institutions such as the International Finance Corporation (IFC) are attempting to bridge this gap by supporting banks in countries like Colombia to issue green bonds. IFC also collaborated with local asset management firms to organise green bond funds dedicated to emerging markets, functioning as an issuer to financial institutions.
In the coming years, organisations like the IFC will create risk averse tools to encourage clients and other entities to expand into the green bond market. Arguably, this will ultimately become a market-wide phenomenon rather than pertain to developed countries.
