What holds back the growth of Asian green bonds
A regulatory environment that favours investor protection over market development and multiple ESG standards are stifling the growth of Asian green bonds
The popularity of green bonds among Asian issuers and investors has undoubtedly expanded rapidly in the past two years, but many industry experts insist more needs to be done in order to boost the development of this asset class.
"Asia has lagged behind the rest of the world, especially North America and Europe; until 2015, we were less than 10% of the total green bond market. But if you look at 2017, we had US$43.4 billion of green bond issuances in Asia, roughly accounting for 36% of the global issuances," says Neelamani Muthukumar, group chief financial officer of Olam International Limited, which successfully issued a US$500 million sustainability-linked club loan in March 2018.
"More importantly, over 11 countries in Asia have already issued green bonds during this year. Already we are seeing close to US$200 billion of green bonds being issued this year," adds Muthukumar.
Despite this explosive growth, two major challenges could block the further development of green bonds in Asia.
In particular, there is a pressing requirement for a more conducive regulatory environment for green bonds in various Asian markets. At present, the regulatory environment tends to favour investor protection. While there is nothing inherently wrong with investor protection, if not managed properly this bias could come at the expense of market development.
Another key development necessary is a convergence of various environmental, social, and governance (ESG) standards linked to the issuance of green bonds. At present, there are at least four sets of standards for issuing green bonds in Asia issued by different bodies.
There is the Green Bond Principles (GBP) issued by the International Capital Markets Association (ICMA), the global industry body, in 2014. The GBP is widely seen as the de facto standards by most green bonds issuers. However, there is also the Social Bond Principles (SBP), as well as the Sustainability Bond Guidelines (SBG), both issued by the ICMA, which overlaps the GBP. Both the SBP and the SBG were updated in June 2018.
In November 2017, the Asean Green Bond Standards (AGBS) was issued by the Asean Capital Markets Forum (ACMF), which comprises capital market regulators from ASEAN countries.
"Considering the nascency of the green bond market in Asia, the regulatory environment has to be more conducive and supportive rather prescriptive and punitive," says Muthukumar.
In an interview with The Asset, Muthukumar says that developing the regulatory environment for green bonds should involve balancing investor protection without constraining market development for green bonds.
"Caution has to be exercised by the regulators to ensure that the regulations are conducive for both the investors and issuers rather than being punitive and prescriptive," Muthukumar says.
In terms of promoting the development of green bonds, Muthukumar says there is a need for incentives particularly in terms of reducing the cost for the issuance of green bonds, plus tax incentives that would encourage more private sector corporates to issue green bonds rather than conventional bonds.
Muthukumar adds that the existing standards and principles for issuing green bonds must converge into a single standard that will promote transparency and confidence in green bonds on the part of investors and issuers alike. Without the convergence of standards, a sense of confusion and a general lack of understanding about green bonds among potential issuers and investors may arise, causing them to shy away from the market.
"By having a convergence of standards and a conducive regulatory environment more private players will be incentivized to become issuers and in so doing promote greater investor confidence," Muthukumar says.