Despite a tumultuous start to 2020, sustainable finance and investing market remains resilient, with strong growth in the social bond market
The COVID-19 pandemic has taken a terrible human toll, disrupted the global economy, and clouded the outlook with uncertainty. Its impact is widespread, and it has affected both the nature and volume of sustainable investing in surprising ways, as private capital finds new opportunities to make a positive impact on the environment and society.
Despite the turbulence in financial markets, Asia Pacific issuance of Green Social and Sustainability bonds (GSS) has held up in 2020. Green bonds might not be enjoying the rapid growth in issuance that they have enjoyed in recent years, with a small year-to-date decline on 2019. Social and Sustainability bonds however are having a strong year, accounting for around 60 per cent of total issuance in Asia Pacific, compared with 20 per cent last year1.
From an Asia perspective, there are signs that the region’s local currency markets are gaining momentum, as the renminbi and the yen are top two issuance currencies for GSS debt after the euro and US dollar. In terms of tenor, regional issuance remains relatively short, with GSS bonds mostly with a three year or three to five-year tenor.
“All of this points to a positive picture for the GSS market in Asia,” said Luying Gan, Head of Sustainable Bonds, Debt Capital Markets, Asia-Pacific, HSBC, who was speaking as a speaker for a webinar that was part of HSBC’s 2020 Credit Conference. “We believe that it is because investors and issuers are incorporating ESH into both their funding strategy and their investment strategy.”
A fixed income response to COVID-19
One of the mains reasons that GSS bond issuance had held up during a period of general financial turmoil is the introduction of a new product that is designed to counteract the negative impact of the pandemic. These so-called COVID bonds direct their proceeds towards projects related to the social issues caused by the virus.
“We are aware that the pandemic is not just a public health issue,” said Ms. Gan. “We are also seeing that economies are hit by the lockdown measures and this reduces consumption and disrupts supply chains. Businesses need funds to help cope with the lack of liquidity and the poor business environment.”
The projects that a COVID bond might contribute to include funding SME lending to a targeted sector to alleviate unemployment, as well as providing access to services that are deemed essential to reducing the spread of the virus. Investment infrastructure can be an acceptable destination for funding, as it can enable social distancing measures – such as working at home.
COVID bonds are categorised as social bonds, as they follow the four pillars of social bond structuring – namely, use of proceeds, reporting, external review, and project selection. Since their inception earlier this year, they have proved a popular instrument for sovereign wealth funds and some Chinese banks, with issuance growing from nothing to $42.4 billion globally in just a few months. It is strong evidence that the entire financial industry – including banks, issuers, and investors – can quickly innovate to address an unexpected global problem.
“There are huge funding needs that need to be met,” said Ms. Gan “The issuance of COVID bond is a strong anchor for the sustainable finance market.”
ESG for China A shares
Away from fixed income, ESG’s growing relevance to China’s A share market was the subject of another webinar, where HSBC’s Co-Head of ESG Research was able to describe the bank’s approach to assessing sustainability.
“HSBC does not do scoring or ratings for sustainability,” said Wai-Shin Chan, who is also the Head of the bank’s Climate Change Centre. “We believe that reducing ESG to a score can detract from the quality of analysis of how an ESG issue affects a particular sector.” Furthermore, he said that the availability of information is hugely variable across markets and industries, which leads to inconsistencies and problems with comparability.
Mr. Chan described how HSBC prefers an integration approach which allows for a forward-looking focus on factors that are materially significant. “This can better capture the sustainability risks and opportunities holistically and can be effectively incorporated into an existing analysis.”
That said, Mr. Chan said that investors need to bear in the mind that an investment process might change when it is put into practice - especially in markets like China, where a localised approach is very important for successful ESG investment.
“You need to understand the cultural sensitivities. Why things are how they are, and how to engage companies in a meaningful way,” he said. “There is often a grey area between what is acceptable and locally accepted practice. These will converge over time as companies move into international markets and gain exposure to global investors.”
Find out more about the ESG integration approach
1. HSBC Green, Social, Sustainability Bond database – based on Dealogic, CBI, Bloomberg, as of 23rd Apr 2020. The data is to the best of our knowledge and may not be fully representative of the SRI market