Sustainable bond issuance in the Asia Pacific region has been growing steadily after nearly tripling in 2021 to US$194 billion, reaching record highs of US$219 billion in 2022 and US$234 billion ($313.5 billion) in 2023.
A growing focus on transition finance will be a hallmark of the region in 2024, underpinning continued strong issuance, according to a Jan 24 report by Moody’s Investors Service.
The credit ratings agency points to sustainable finance policies “in place or under development” in a number of jurisdictions in the region.
These include Japan’s Basic Guidelines on Climate Transition Finance, which was announced in 2021; and the Monetary Authority of Singapore’s (MAS) Singapore-Asia Taxonomy for Sustainable Finance, which was launched at COP28 in December 2023.
Even as Asia Pacific issuance grows, Europe will continue to account for the largest share of issuance by region in 2024. The region generated 45% of overall sustainable bond issuance last year, say Matthew Kuchtyak, vice president of sustainable finance; Erika Bruce, senior ESG associate; and Rahul Ghosh, managing director of sustainable finance at Moody’s.
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After reaching a record US$491 billion in 2021, issuance in Europe has declined but remained strong, totalling US$411 billion in 2022 and US$428 billion in 2023. “Sustainability issues remain top of mind for many issuers and investors in Europe, and sustainable bonds have accounted for about one-fifth of overall bond issuance in the region over the past few years.”
According to Moody’s, sustainability bonds offer a unique opportunity for issuers to combine green and social use of proceeds to advance their broader sustainability objectives. “The segment is ideal for supranationals and sovereigns, given the aim to both support living standards and fulfil commitments to expand climate finance, especially in emerging markets.”
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They may also find a place in the private sector, says Moody’s. The broad “sustainability bond” label could appeal to issuers that seek to highlight their own sustainability goals.
‘Increasingly ambitious’ plans
Moody’s expects continued growth in transition finance this year. “A growing number of issuers use labelled bonds to finance their increasingly ambitious decarbonisation plans.”
Use of the sustainable bond market by issuers in sectors with high exposure to carbon transition risk — or “dirty” sectors — is not a new phenomenon.
In 2023, issuers in these sectors accounted for US$112 billion of sustainable bond issuance, which represented 43% of non-financial corporate volumes.
Around three-quarters of this issuance came from companies in the energy and utilities and automotive sectors, where scalable decarbonisation solutions generally exist today, says Moody’s.
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Overall, however, these transition sectors have a total of US$4.9 trillion of Moody’s-rated debt outstanding.
The agency thinks this suggests “significant potential” for increases in future sustainable bond issuance. “As we move into 2024, transition finance will continue to evolve, with a key area to watch being the growing investment in emerging green technologies. Policy support for green solutions, including green hydrogen, biofuels, battery storage and carbon capture, utilisation and storage, is fuelling growth in private and public investments.”
In some hard-to-abate sectors like steel, cement, shipping and aviation, low-carbon technologies are not available at scale today.
“The rollout of new technologies is an important component of sectoral decarbonisation pathways,” says Moody’s. “Although these sectors have been relatively minor contributors to sustainable bond volumes in recent years, the growth of emerging green technologies could incentivise companies to enter the market, diversifying sectoral issuance over time.”
Pivotal year for SLBs
Moody’s annual forecast examines the current spectrum of sustainable bonds: green, social, sustainability and sustainability-linked bonds (SLBs).
In 2024, Moody’s projects total sustainable bond issuance to reach US$950 billion in 2024, largely flat compared with US$946 billion in 2023, despite still-high interest rates and slowing economic growth.
The forecast comprises US$580 billion of green bonds, US$150 billion of social bonds, US$160 billion of sustainability bonds and US$60 billion of SLBs.
SLBs, in particular, face a pivotal year as market scrutiny intensifies, says Moody’s. “Continued investor focus on the robustness and achievement of sustainability performance targets and the materiality of financial adjustments has discouraged some would-be issuers from entering the market.”
SLBs accounted for 7% of sustainable bond issuance last year, down from 8% in 2022 and 9% in 2021, while SLB issuance dropped for the second consecutive year, with volume sliding to US$10 billion in 4Q2023, the lowest quarterly total since the segment began its ascent.
Unlike “use-of-proceeds” bonds, such as green, social and sustainability bonds, issuers of SLBs do not have to channel all the proceeds to predetermined green or social projects.
Instead, issuers must set sustainability performance targets (SPTs), which, in turn, generally affect the characteristics of the bond, typically the coupon rate.
For example, an issuer that fails to meet its SPTs will have to pay a higher coupon rate to bondholders.
Concerns about market quality and integrity have plagued the instrument in recent years, says Moody’s, and greenwashing has discouraged would-be issuers from entering the market.
An International Capital Market Association report about greenwashing risks identified the SLB segment’s lack of ambition in the early days of issuance as a contributing factor to questions about the credibility of the instrument.
However, the report also showed that the quality of sustainability-linked bonds has been improving more recently, a finding that “aligns” with Moody’s observations.
Nevertheless, there remains a gap in quality between use-of-proceeds and sustainability-linked instruments, in part because the SLB segment “remains at an early stage of development”.
In Moody’s Second Party Opinion (SPO) portfolio, 82% of frameworks and instruments assessed received an SQS1 (excellent) or SQS2 (very good) overall score since October 2022.
But there is a clear difference between use-of-proceeds and sustainability-linked instruments in the portfolio, says Moody’s.
While 90% of use-of-proceeds frameworks or instruments received an SQS1 or SQS2 score, only 56% of sustainability-linked instruments or frameworks received one of these top two scores on the fivepoint scale.
According to Moody’s, SPOs and their underlying scores reflect pointin-time analyses that can be updated upon request by the issuer.
They are not credit ratings but provide an additional tool for market participants to use in conducting their own analysis.
As market and regulatory scrutiny intensifies this year, the risk of perceived greenwashing concerns could drive issuers to consider the vanilla use-of-proceeds instruments over SLBs, despite the latter’s flexibility in allocation of proceeds, says Moody’s.
“This may even extend to carbon transition exposed sectors, where some companies face a dearth of near-term, scalable green projects.”
About two-thirds of SLB issuers in 2023 were making their debut in the segment, accounting for around 47% of SLB volumes globally.
First-time entrants represented 31% of use-of-proceeds issuers in 2023, by comparison, and accounted for just 12% of total use-of-proceeds issuance, according to Moody’s.
“With waning appetite for SLBs, we expect volumes to decline both in absolute terms and as a share of total sustainable bond issuance,” says Moody’s.
Infographics: Moody's
