Investors eager for region’s dollar-denominated green bonds
As Asian countries subscribe to the Paris climate agreement goals, green bonds are providing the finance for climate-related and environmental projects in the region. The supply of Asian US dollar-denominated green bonds rose from just USD 2 Billion in 2015 to USD 17.5 Billion in 2019, and while issuance was hit by COVID-19, it is expected to return to pre-pandemic levels in 2021.
The Asian dollar-denominated green-bond market is now worth USD 50 Billion. That is about half the size of the Asia local-currency green-bond market, but it has been catching up with the global market quickly and now accounts for 24 per cent of the global dollar-denominated green-bond universe, up from 8 per cent five years ago.
China is Asia’s largest issuer and the second-largest globally with USD 22 Billion of dollar bonds outstanding – dominated by banks and property developers – plus USD 96 Billion in renminbi-denominated green bonds. India is next-largest.
The market’s strong growth reflects a rising awareness of environmental, social and governance issues plus increasing demand for ESG and sustainable investment products.
The green financing channel allows issuers to tap into longer-term funding and a larger investor base, permitting issuers to brand themselves as socially and environmentally responsible, despite higher set-up costs for green bonds and additional annual auditing and reporting.
Demand has exceeded supply, with order-books for new issues in 2020, on average, 5.7-times bigger than the bonds available. Asian investors and fund managers are the main buyers.
Yet despite this strong demand, Asian green bonds are priced broadly in line with the region’s non-green bonds, without yield premium seen in developed markets. This may reflect different bond currencies and investor bases plus Europe’s larger pool of ESG and green-bond investors and investments.
And being green does not make bonds safer: 2020 saw the first green-bond default. About three-quarters of Asian dollar green bonds are investment grade – primarily bank, sovereign and quasi-sovereign bonds.
Some USD 10.8 Billion of dollar-denominated green bonds were sold between January and October but we forecast gross issuance of USD 17 Billion to USD 20 Billion in 2021, backed by growing green projects and USD 8 Billion to USD 10 Billion of refinancing, thanks to strong investor demand and favourable government policies.
Pledges by Asian countries to meet Paris Agreement goals include China’s aim for carbon emissions to peak before 2030 with carbon neutrality before 2060; India’s plan to reduce the emission intensity of GDP to below 2005 levels by 2030; Indonesia adopting new and renewable energy for at least 23 per cent of primary energy in 2025; and the Philippines banning new coal-fired power plants. Meanwhile Singapore has introduced a carbon tax, and South Korea hopes to become carbon neutral by 2050.
We believe such policies mean governments will incentivise companies to undertake green projects and encourage broader and easier green financing channels, including green bonds.
Asia’s dollar-based green-bond financing has focused on renewable-energy, energy efficiency and clean-transportation projects to reduce carbon emissions. We now also expect to see more resources allocated to pollution prevention and natural resources management, allowing a greater diversity of issuers to join the green financing market.
First published 5 November 2020.
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As of 03 November 2020, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
______ All covered issuers _______ Issuers to whom HSBC has provided Investment
Banking in the past 12 months
Count Percentage Count Percentage Overweight 123 26 78 63
Neutral 212 45 103 49
Underweight 134 29 55 41
For the purposes of the distribution above the following mapping structure is used: Overweight = Buy, Neutral = Hold and Underweight = Sell. For rating definitions under both models, please see "Definitions for fundamental credit and covered bond recommendations" above.Distribution of trades
As of 30 September 2020, the distribution of all trades published by HSBC is as follows:
____ All covered instruments _____ Issuers to whom HSBC has provided Investment Banking in the past 12 months
Recommendation Count Percentage Count Percentage
Buy 157 69 95 61
Sell 69 31 29 42
For the purposes of the distribution above the following mapping structure is used: Buy/Sell protection/Receive/Buy Receiver/Sell Payer = Buy; and Sell/Buy protection/Pay/Buy Payer/Sell Receiver = Sell. ASW is counted as a buy of the bond and a paid swap, and RASW as a sell of the bond and a received swap. For rating definitions under both models, please see "Definitions for trades (Rates and Credit)" above.
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