By SPECIAL TO THE NATION
The key stakeholders in this - governments, corporations, the financial system - are beginning to realise that the part they play (in the way they allocate capital) will shape the speed of low carbon transition and future economic growth.
A key driving force behind change is the global task force on climate related financial disclosure set up by the G20, and mandated to develop a voluntary framework for companies to disclose the financial impact of climate-related risks.
Green bonds will become an increasingly important piece of the puzzle as investors move towards a more transparent reporting regime.
The market is growing rapidly. Issuance rose 45 per cent last year alone, to US$129 billion, and could increase to between $140 billion and $180 billion this year.
Investors are now more than ever factoring sustainability issues into their investment.
A recent HSBC study found that 68 per cent of surveyed investors planned to increase their low-carbon related investments. There are still some obvious hurdles to overcome.
A key challenge relates to companies and investors moving at different speeds.
HSBC’s research showed that 53 per cent of corporates have a strategy in place to reduce their environmental impact and 68 per cent of investors planned to increase their climate-related investment, yet only 34 per cent currently hold green bonds in their portfolios.
Another challenge is the lingering skepticism over the “greenness” of specific bonds. Are proceeds really deployed to finance climate-related or environmental projects? Who assesses whether a particular issue is as “green” as another?
Many investors are wanting to see more consistency and transparency in these areas before dipping a toe in the water while some potential issuers shy away from the additional efforts and costs associated with tracking and reporting on use of proceeds and certifying “green” issues.
Despite current perceptions, the advantages of issuing a green bond are actually substantial.
For a start, issuing green bonds allows companies to tap the growing demand for these instruments among pension funds, sovereign wealth funds and other investors who are concerned about their portfolios’ exposure to high-carbon and unsustainable issuers and activities.
Moreover, the launch of a green bond allows an issuer to demonstrate they are aware of and preparing for the long-term challenges of global warming.
There is also mounting evidence that some green bonds trade inside non-green bonds, and are less volatile in times of market stress. These characteristics, coupled with increased investor appetite for low-carbon related investments, could be a catalyst for more companies to issue.
The increasing momentum behind green bonds means issuers and investors can no longer afford to ignore them.
In fact, we’re starting to see change.
As of 2016, there were some $23 trillion of assets professionally managed under responsible investment strategies. That’s up 25 per cent since 2014, and represents more than a quarter of all professionally-managed assets globally.
Among the Asian markets, Singapore is making notable progress in the green capital market, where the government has played a key role as an advocate for sustainable financing.
Efforts have also been undertaken to make Singapore’s capital markets more attractive both to issuers and investors through the introduction of initiatives such as the Asian Green Bond Scheme and the Asian Bond Grant scheme.
It is clear that changing investor behavior in response to global initiatives around managing Environmental, Social and Governance (ESG) risk can only help to raise awareness of and spur interest in green bonds, and as such will be an important catalyst to the development of this market.
Contributed by SEAN HENDERSON, Deputy Head of Debt Capital Markets, Asia Pacific, HSBC