Center of gravity of sustainable finance is swinging towards Asia
Demand in Asia for green financing is growing and coming from multiple sources
While European institutions receive many plaudits for proactive initiatives in greening their economies, Asia will eventually be the home of the green financing revolution.
The mature economies in Asia with their infrastructure well established are now weaning their populaces away from traditional sources of power such as coal, petroleum, natural gas, hydro, and nuclear power systems.
Asia’s emerging countries meanwhile require large-scale infrastructure developments as their rapidly growing populations need housing, education, and healthcare. And to deliver that requires a huge amount of energy and finance, both of which should be green.
Asia has the numbers, both in terms of people and the liquidity, and increasingly the region is embracing the need and use of sustainable and so-called green initiatives.
This demographic dividend however is helping to underpin the change in mindset and is bolstering the actions of regulators and government officials to stimulate the adoption of green and sustainable finance in Asia.
It is in this context that a global bank like Societe Generale can play a key role in sustainable and impact finance in both Asia and Europe.
As a founding signatory of the Principles for Responsible Banking, Societe Generale joined the Collective Commitment on Climate in September which saw the bank renewing its commitment to the UN’s Sustainable Development Goals and the Paris Agreement targets.
This incorporates an ambitious new target of raising 120 billion euros (US$131.26 billion) for the energy transition between 2019 and 2023, of which 100 billion euros is dedicated to sustainable bond issues and 20 billion euros is dedicated to the renewable energy sector through advisory and financing.
The bank also committed to progressively reducing to zero its exposure to the thermal coal sector, at the latest in 2030 for companies with thermal coal assets located in EU or OECD countries and 2040 elsewhere.
A major part of Societe Generale’s sustainable and positive impact finance team in this region is Singapore-based Raj Malhotra, managing director, head of debt capital markets Asia-Pacific, at the bank.
The Asset recently met with Malhotra who shared his observations and some details on the positive and growing impact of sustainable finance.
Addressing the growing interest and appetite, particularly from Asia, in sustainability issues Societe Generale has been discussing with borrowers and investors the potential benefits of having sustainability embedded into the way they do business.
Demand in Asia for green financing is keen and is coming from multiple sources.
“It is bottom up and top down, that's another reason why this market is growing because you do see the demand from both sides and all parties are looking to be aligned in terms of making this work,” says Malhotra.
“Some investors are looking for certain names where they feel the instrument is safe and secure, just like any typical credit decision. Some are doing it more for a philanthropic reason or maybe it is a family office that has a certain portfolio aimed towards the more ESG type of themes,” Malhotra adds.
On a global basis the sustainable bond market is still nascent. In 2019 to date, close to 160 billion euros has been raised via green, social and sustainable bonds. But it's still a real drop in the ocean compared to the overall bond market.
However, the upward trend is robust as the sustainable bond market was less than 40 billion euros in 2015 and has almost quadrupled in size over the last five years.
Until now, much of the development has been driven out of Europe backed by investors comfortable with the new green finance offerings, but the appetite in Asia is rising fast. So can we expect Asian issuers to pick up the baton and drive the trend to new highs?
As an increasing number of jurisdictions around Asia embrace and, in some cases, push green finance, the answer looks likely to be a resounding yes.
Japan’s massive pension fund GPIF, for example is committed to investing a hefty share of its US$1.5 trillion assets into green bonds and Singapore, Hong Kong and Indonesia are promoting green finance.
Likewise, financial institution groups across the Asia-Pacific have been very active in the segment and across formats.
“By sector, sovereigns, supranationals and agencies, these tend to be the largest issuers in Asia. We've seen Indonesia with their green sukuk, and then Hong Kong did a green bond and South Korea issued its debut this year as well,” Malhotra says.
“Increasingly now we're seeing corporates and banks come in with some looking at green loans, not just green bonds. So there are different types of financing, different formats, but all of these markets are growing quite rapidly,” he adds.
Malhotra draws a climate change analogy as he describes the green and sustainability financing market in Asia as being just the tip of the iceberg.
“There's going to be a significant need for renewable energy, for ways of producing and transporting food more efficiently, for healthcare and for education. With a young population in Asia, we're also going to need a lot of infrastructure in place for the coming smart cities,” says Malhotra.
A lot of these undertakings will need to be financed in different formats and the bond markets can play a big role in this.
According to Malhotra, a couple of years ago, the market was simply green bonds. Renewable energy and energy efficiency were the main uses of those transactions. Some issuers were also beginning to see how they could do social good.
“Whether it's a loan format, whether it's a bond format, some kind of innovative financing will be required. And if you can overlay it with a green or social or sustainable framework, I think it will open up to a much larger investor base and meet their demands,” Malhotra says.
At the current rate of traction therefore, there should be little doubt that the centre of gravity of green and sustainable financing is swinging ever closely to Asia, where it will eventually belong.
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