- Is the boom in Asian ESG bond issuance proof that companies are keen to align their businesses with environmental, social and governance (ESG) factors? Or are companies just keen to follow ESG trends in order to broaden their investor base and appear more socially responsible?
- We compared the terms and structures of recent ESG $ bond issues in Asia ex-Japan, analysing factors such as the uses of proceeds, ESG frameworks, second party opinions, industry certifications and funding structures.
- Indian renewable energy providers are among the few inherently “green” issuers within the Asian $ credit universe. They were also among the first to issue green bonds in Asia, many of which are similar to project financing instruments, with restricted groups of assets. Greenko and ReNew Power are our preferred credits in this sector.
- Asian banks, mostly from China, have also been regular issuers of ESG bonds. Most fall into the green category and are used to provide funding for projects such as renewable energy, metro projects, green buildings and sustainable water management. Others are classed as social bonds, targeting employment generation through SME financing or microfinance, or creating affordable public housing. Asian banks have also issued sustainability-linked and transition bonds.
- For many other Asian corporates, the ESG changes to their operations are less distinct. Some ESG targets are not quantifiable or are hard to monitor: noise reduction or dust control during construction, for instance, or the conversion of canteen waste into fertilizer. Others may be offset by other, overarching factors: Delhi International Airport’s bond will fund a green building terminal expansion, which will eventually result in higher aircraft emissions (investors can take comfort that the green bond will not fund the construction of 1,000 new car parking spaces). Uses of proceeds for ESG bonds range from the construction of large scale infrastructure projects, to slaughterhouse water recycling facilities, to COVID-19 crisis response efforts.
- It is difficult for investors to conduct independent due diligence on issuers’ ESG credentials and performance. As a result, they become reliant on the second-party opinions and annual ESG reports provided by the issuers.
- We expect the ESG borrower base will continue to expand rapidly in Asia. But investors seeking assurance that their bonds are making a change from an ESG perspective should probably stick to renewable energy providers.