ENVIRONMENTAL, social and governance (ESG) bond issuances in South-east Asia are off to a strong start in 2024, after a tepid showing in 2023.

Proceeds rose to US$5.1 billion in the first quarter of the year, a 27.4 per cent increase from US$4 billion in the same period a year ago, according to data compiled by LSEG.

In comparison, global ESG bond proceeds increased 10.7 per cent to US$247.8 billion; and the amount raised in Asia-Pacific increased by 4.5 per cent to US$41.1 billion.

The value of ESG loans issued in South-east Asia shrank, however, declining 31.9 per cent to US$6.1 billion from US$8.9 billion.

The decline was driven mainly by lower sustainability-linked loans, which fell 71.6 per cent to US$2.2 billion from US$7.8 billion.

Sustainability-linked loans have historically been the debt instrument of choice among South-east Asian corporates.

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SLBs rise

Sean Henderson, co-head of debt capital markets for Asia-Pacific at HSBC, attributed the improved issuance numbers to a greater diversity of issuers. 

Corporates, financial institution groups, as well as sovereign, supranational and agency entities, joined in the fray in the most recent quarter. ESG bond volumes were mainly driven by sovereigns and a smaller handful of corporates the year before, he added.

Issuers in Q1 included ST Telemedia Global Data Centres and the Housing Development Board in Singapore, as well as My EG Services and LBS Bina in Malaysia.

“Some issuers that came this year have also been monitoring the market for a while, which allowed them more time to integrate an ESG element into their transactions,” said Henderson.

He added that growing ESG regulatory incentives in South-east Asia have led issuers to develop more comprehensive ESG strategies, which includes issuing ESG-labelled bonds. Issuers are also incentivised by strong investor appetite for such bonds.

While green bonds – being the oldest and most mature ESG-labelled debt instrument – are still the most common choice in South-east Asia, the number of sustainability-linked bonds (SLBs) has grown. 

Proceeds from such bonds – which subject an issuer to a higher coupon if they fail to meet a sustainability target – came in at US$832.4 million in Q1 2024, versus US$67.9 million for the whole of 2023. 

SLBs are still relatively less well known in the region, but investor demand for recent issuances suggests South-east Asia capital markets are getting more familiar with SLBs as a fund-raising instrument and corporates are more agreeable to publicly commit to sustainability performance targets, said Clifford Lee, global head of investment banking at DBS. 

Green bonds tend to be favoured because they do not require sustainability targets. The latter have tended to attract scrutiny, with critics mainly calling out a lack of ambition in target setting.

HSBC’s Henderson expects more issuers to consider using SLBs to fund green, social or transition projects in the future, instead of mostly funding general corporate purposes currently.

He is also seeing issuers in this region bringing innovation and ambitiousness into the ESG bond market. The ST Telemedia Global Data Centres SLB, for example, was the first sustainability-linked hybrid in Asia. 

There will also be continued interest from corporates in South-east Asia across various industries to explore issuing SLBs, said Rahul Sheth, global head of sustainable bonds at Standard Chartered (StanChart).

“Increasingly, more issuers are sharing their decarbonisation strategies and have set short-to-medium-term quantitative goals for emissions reduction, which is a promising sign for the Asean SLB market,” added Sheth. 

Positive outlook

Bankers are positive about the overall volume of ESG bond issuances for 2024, although they noted that some issuers are waiting for United States Treasury yields to stabilise before issuing new bonds.

Market expectations are for the US Federal Reserve to lower interest rates in the second half of the year, which should propel an increase in overall issuance volumes.

There were no sovereign issuers in South-east Asia for Q1 2024 (HDB is not considered a sovereign issuer), but Sheth believes sovereign issuances could potentially happen later in the year.

The top bookrunners for ESG bond deals in South-east Asia over Q1 2024 were StanChart (US$1.4 billion), HSBC (US$677.1 million) and Citi (US$473.9 million).

ESG loans

As with South-east Asia, the wider Asia-Pacific region also saw a decline in ESG loans in Q1 – by 13.5 per cent to US$20.7 billion. In comparison, global funds raised through ESG loans increased 35.1 per cent to US$169.6 billion.

The better performance of ESG bonds relative to its loans could be a result of credit spreads in Asian bond markets reaching an all-time low, making it relatively favourable for corporates to turn to fixed-income instruments, said OCBC’s credit research team. 

“This has been driven by strong market liquidity relative to supply in Asia’s public credit markets,” added OCBC. 

Amid rising costs, higher credit impairments, and banks’ net interest margins looking to be compressed in 2024, banks may have been more stringent in asset underwriting as well, it added. 

“Banks may look to limit risk-weighted asset growth to protect capital ratios. Loan costs may also be rising to offset rising deposit costs.”

DBS said that it continues to observe healthy interest in ESG loans from clients across the regions. 

Activity has been driven mainly by companies in the energy, renewables, infrastructure and real estate sectors, said Lim Wee Seng, group head of sustainability, strategic advisory, project finance and energy, renewables and infrastructure at DBS.

He expects ESG loan activity to continue growing this year on the back of growing emphasis on responsible business practices and sustainable supply chains, increasing stakeholder expectations as well as regulatory pressure. 

OCBC was the top arranger for ESG loans in South-east Asia in Q1, with US$1.1 billion raised. DBS came in second at US$1 billion. Sumitomo Mitsui was third with US$494.4 million raised.