Sustainable bond sales highlight intensified Asia-Pacific focus on climate goals
South Korea's issuance of its first sovereign green bonds in June follow similar recent offerings from other Asia-Pacific governments such as Hong Kong and Indonesia
On 13 June, South Korea issued its maiden green and sustainability sovereign bond, following similar recent offerings by other governments in Asia-Pacific. The growing volume of sovereign green bond sales in the region highlights the increasing focus of authorities on raising capital for climate change mitigation and adaption efforts. Growing issuance by governments and public sector institutions will also contribute to establishing broader and more liquid markets, including through the development of green benchmarks for private sector borrowers.
Korea sold its inaugural US$500 million five-year green and sustainability bond at an interest rate of 2.177%, alongside a US$1 billion conventional 10-year bond with an interest rate of 2.677%. Both offerings were foreign exchange stabilization bonds, which the government issues periodically to secure additional foreign currency reserves to shield against global volatility, while also providing benchmark rates for private sector borrowing.
The inclusion of the green bond reflects Korea's focus on “innovation and inclusive growth” and will provide capital to eligible projects within its green and sustainability bond framework, which is aligned with the United Nations' Sustainable Development Goals.
Korea's issuance follows the recent entrance of other Asia-Pacific governments into the green bond market. In May, Hong Kong offered US$1 billion in its maiden green bond sale, while Indonesia – which issued its first sovereign green bond in March 2018 – also sold US$750 million in green sukuk earlier this year. Fiji was the first government in the Asia-Pacific to issue a green bond in November 2017.
Globally, the pickup in sovereign green bond sales through the first half of 2019 – which include an inaugural green bond from the Netherlands, Nigeria's second green bond issuance, and offerings from France and Poland – confirms our expectation that the pace of issuance will accelerate over the coming years.
Alongside growing investment demand for green and sustainable products, governments' commitments to their climate and environmental policy agendas, and a desire to facilitate greater private sector capital flows into green and sustainable investments by providing benchmarks and enhancing liquidity, will continue to drive sovereign green bond sales.
Sovereign green bond issuance in January to mid-June 2019 reached over US$15 billion, according to data from the Climate Bond Initiative, a level that is close to full-year issuance in 2018 (see Exhibit 1).
Since 2016, European governments have been responsible for over 90% of sovereign green bond sales. With a growing number of government issuances (four through mid-June 2019 versus two in the whole of 2018), we expect that Asia-Pacific will account for a growing share of sales as climate mitigation and adaption efforts intensify.
While we do not identify Korea among the sovereigns that are most susceptible to climate change, many of its cities are increasingly suffering from fine dust pollution. Approximately one-third of the 7 trillion Korean won (US$6 million) (0.4% of GDP) supplementary budget proposed in April 2019 focuses on reducing pollution, including through subsidies for replacement of diesel-powered cars and incentives for the purchase of air purification and renewable energy technologies.
Currently, approximately 8% of the country's power generation portfolio comes from renewable sources. With the government's new energy policy targeting renewable sources comprising 20% of total power generation by 2030, greater financing for renewable energy projects from green bonds, in addition to clean transportation and other energy efficiency projects, will help Korea to reduce its dependency on fossil fuels.
Hong Kong's inaugural US$1 billion green bond is the government's first under its framework developed in November 2018. At HK$100 billion (US$12.7 billion), the government's green bond program is one of the largest among sovereigns globally and will fund projects in clean transportation, air quality improvement and green buildings.
The issuance also promotes Hong Kong's strengths as a regional green finance hub. According to a survey by the Hong Kong Monetary Authority, 60% of 47 major banks in the territory plan to promote green finance and sustainable banking. In June 2018, the government announced a scheme under which eligible green bond issuers can obtain grants for the full cost of obtaining certification under Hong Kong's green finance certification scheme.
Michael S. Higgins is an associate analyst and Gene Fang is associate managing director, both with the Sovereign Risk Group, Moody's Investors Service.
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