Despite a shrinking bond market in Asia – buffeted by global economic and political headwinds – bonds in the general category of environmental, social or governance (ESG) are emerging as the market’s only bright spot as they gain favour with investors and grab an increasing share of a shrinking market.
ESG-labelled bonds, according to JP Morgan’s ESG Financing Outlook for 2023 report, accounted for 28.2% of the total bond supply in Asia ex-Japan year to date (October 17), which represents an 8.3% increase over last year. This comes despite total bond issuance volume having dropped 56% over the same period and the projected value for 2022 issuance expected to remain flat at US$70 billion.
However, even within the ESG-labelled bond space, according to Fitch Ratings, the volume of green bond issuance in Asia dropped by 21% in the third quarter of 2022, and sustainability-linked bonds (SLB) fell by 62% quarterly to US$7.9 billion.
The precipitous drop in SLB issuance is attributed by Fitch Ratings to the withdrawal of corporate issuers, normally the market’s leading players, whose share drastically dropped to 4% in 2022 from 24% in 2021. Adding to the malaise, research by Bank of America shows that no SLBs were issued during the third quarter of 2022.
The SLB issuance decline, JP Morgan suggests, is due to a combinations of central bank rate hikes and increasing inflation precipitated by geopolitical tensions, among them the Russian-Ukrainian war, continuing to drive up prices of food and oil, which have dampened investor sentiment.
Bucking the deterioration of the overall bond market, ESG-labelled bonds are becoming more accessible to countries as they are increasingly available in multiple currencies backed by dollar-denominated sustainability bonds. And sovereigns, supranationals and agencies are proving to be important innovators in the market with, for example, Singapore this year issuing its debut long-dated sovereign green bond.
China and South Korea, according to JP Morgan, are the most important players in Asia, accounting for 49% and 26% of ESG bond issuance respectively in this region. The onshore ESG bond issuance volume in China hit US$167.8 billion year to date, a 21.7% increase year on year, while offshore issuance declined 10.8% to US$25.7 billion. And the ESG bond market in South Korea remained stable compared with last year.
As for the Asean ESG bond market, research shows that the Philippines and Indonesia have dominated the region and the Singapore dollar has also entered the market. For example, the Monetary Authority of Singapore announced its public offering for a 50-year sovereign green bond valued at S$2.4 billion (US$1.7 billion) this August.
ESG-labelled bonds are expected to be a key motivator of growth for the Asian market, with JPMorgan estimating that they will account for 35% to 40% of overall bond issuance in Asia in 2023, driven by investment-grade issuers and sovereigns.