Financing sustainability: How do investors and issuers in APAC's sustainable finance market view the present market opportunities and constraints?

To learn more:

Download report | Watch video

Financing sustainability: Asia Pacific embraces the ESG challenge is an Economist Intelligence Unit report, sponsored by Westpac. It explores the drivers of sustainable finance growth in Asia Pacific as well as the factors constraining it. The analysis is based on two parallel surveys—one of investors and one of issuers—conducted in September and October 2019.

If the countries of Asia Pacific are to limit the negative environmental effects of continued economic growth, and companies in the region are to mitigate their potential climate risks and make a positive business contribution through improving the environment and meeting the UN's Sustainable Development Goals (SDGs), large volumes of investment in sustainable projects and businesses need to be mobilised. A viable sustainable finance market is taking shape in the region to channel commercial investor funds, and both investors and issuers say they are achieving a financial benefit from their investment and financing activities. The market is still in the early stages of development, however, and must expand and mature to meet investor needs.

The chief constraint on sustainable finance growth in the region has been the limited supply of bankable sustainable projects. Our research suggests supply is increasing, but with investor demand continuing to grow apace, the gap will remain an obstacle in the short- to medium-term. Among the organisations in our issuer survey, only 7% have used sustainable finance instruments to fund projects. However, nearly nine in ten (87%) said they intend to do so in the next year, which should begin to bridge the gap between supply and demand.

Based on issuers’ stated intentions, investors will have a range of instruments to choose from, including green loans and bonds and sustainability loans and bonds. Large numbers of investors indicate that they intend to deploy a greater proportion of capital to these over the next three years.

Awareness that sustainability means more than reducing carbon emissions is mounting in Asia-Pacific. Evidence to the fact shows in the response of the region’s sustainable finance market to the global pandemic.

In late 2019, the market was bullish. Asia’s sustainability-related assets under management looked set to grow appreciably, and most investors saw those holdings performing better than traditional equivalents.1

Then covid-19 struck.

The crisis might have been expected to stop the market’s growth in its tracks. Volumes have indeed decreased this year, but a shifting of issuances toward sustainability areas in dire need of attention—pandemic relief and recovery—points to a market capable of adapting quickly to unexpected shocks.

To assess covid-19’s impact on sustainable finance in Asia-Pacific, we consulted representatives from key stakeholders —an issuer, an industry association and a large investor. Their consensus for longer term development is positive, but they underscore the need to address two current inhibitors in the market: a continuing shortage of supply from issuers, and insufficient clarity around definitions and reporting.

Moving beyond green

Prior to 2020, green bonds accounted for the lion’s share of sustainable financing issuances in Asia-Pacific. By mid-2020 that picture had changed considerably, mirroring a trend visible in Europe and other markets—a stark decline in green bond issuance combined with accelerated growth in social bonds.2 Matthew Kuchtyak, assistant vice president, ESG & Sustainable Finance at Moody’s Investors Service, attributes the decline in green bonds largely to reduced Chinese issuance. The pandemic-driven growth of social bonds, meanwhile, boosted that category’s share of green, social and sustainability (GSS) bond issues from 7% in the full year of 2019 to 31% in the first half of 2020, according to Moody’s data.3

1 These were among the findings of a report written by The Economist Intelligence Unit, Financing sustainability: Asia Pacific embraces the ESG challenge, published in February 2020.  2 Green bonds are used to finance or refinance projects or assets having environmental objectives, in areas such as clean energy and low-emission transport. Social bonds fund projects having social objectives, related for example to health, education or employment. Sustainability bonds target projects that combine social and environmental objectives. See Financing sustainability, page 8, for descriptions of the different types of sustainable finance instruments. 3 Data provided to The EIU by Moody’s Investors Service on September 18th 2020.