Greening of the Asian financial ecosystem takes great strides

April 22, 2021 06:00
Source: Refinitiv Lipper

Sustainable financing has gained significant traction in 2020 and regulators in Hong Kong and across Asia have stepped up efforts to promote the development of green finance and support the region’s transition to a sustainable future. For instance, in December 2020, the Green and Sustainable Finance Cross-Agency Steering Group of the Hong Kong Monetary Authority (HKMA) announced its strategic plan to strengthen Hong Kong’s green and sustainable finance ecosystem. Some of the key areas include promoting the flow of climate-related information at all levels to facilitate risk management, capital allocation and investor protection.

Fund flows into Environmental, Social and Governance (ESG) investments in Asia and across the globe witnessed a sharp increase in 2020 compared to 2019, with Refinitiv’s Sustainable Finance Review indicating that sustainable finance bonds hit an all-time annual record of US$544.3 billion in 2020, more than double the issuance levels in the previous year.

Similarly, data from Refinitiv Lipper shows that assets under management for ESG funds in Asia reached more than US$60 billion in end December 2020, doubling that of 2019.

As we approach the second half of the year, we see three encouraging trends for sustainable investment in Asia that point towards the deepening of ESG agendas across the region.

1) North Asia takes the lead

Asia Pacific deal making involving sustainable companies accounted for 33 percent of mergers and acquisition activities in 2020 by deal value. Based on the number of deals, China took the lead globally during this period, accounting for 20 percent of total sustainable deal making activity globally, followed by the United States (9 percent), India and Italy (7 percent). China also represents one of the largest markets for green bonds, and it is home to a diverse array of other innovative green finance and ESG-themed products such as green funds, insurance products, exchange traded funds (ETFs) and asset-backed securities.

Alongside China’s national push to achieve carbon neutrality by 2060, regulators are also helping to accelerate the momentum for corporate ESG monitoring and disclosures in China. China’s stock exchanges have also issued market guidance for ESG information disclosure. Looking at the Chinese Securities Index (CSI) 300 companies, only 54 percent of them have voluntarily published annual ESG reports in 2013, but this has risen substantially to 85 percent of CSI300 companies in 2019. However, only 12 percent of those companies that disclose ESG data have audited reports, and the average scope and quality of ESG disclosures among CSI300 companies are still lagging behind US and European counterparts.

2) Evolving green taxonomies

Sustainable finance taxonomies play an instrumental role in helping investors better identify sustainable business amid concerns over greenwashing and a lack of standardised ESG regulations and reporting.

China published its green taxonomy (the Green Bond Endorsed Project Catalogue) in 2015, and China’s central bank announced in late March that it is co-operating with the European Union to push for greater convergence of taxonomies of green finance and investments across the two markets. The aim is to implement a jointly recognised classification system for the environmental credentials for businesses by the end of 2021.
Across the region, Hong Kong is also joining the green taxonomy trend. The HKMA aims to adopt the Common Ground Taxonomy expected to be developed by mid-2021 by the International Platform on Sustainable Finance Working Group on Taxonomies co-led by the European Union and China.

Although more specific definitions for sustainable finance is important, complete harmonisation is always difficult. A clear mapping of the underlying data sets which are the taxonomy’s building blocks to compliance is achievable and should be prioritised.

3) Green bonds go social

The range of green financing solutions available to investors has broadened significantly in recent years, with products such as Green ETFs, green private equity, green loans, as well as other listed and unlisted products hitting the market. Asia would do well to keep up, to innovate and to deepen liquidity in local markets for new green financing instruments. In Hong Kong, the Financial Secretary Paul Chan Mo-po announced in January 2020 that the government offered the second batch of government green bonds totalling US$2.5 billion, among which the 30-year tranche is the longest-tenor bond issued by the Government and the longest-tenor USD-denominated government bond in Asia to date.

Apart from green bonds, social bonds have also emerged as an alternative funding tool in Asia, useful in the fight against the pandemic by mitigating the socio-economic impact of the crisis. This was largely driven by an increase in capital-raising by sovereigns, multilaterals, and banks to support Covid-19 relief and recovery efforts. The proceeds allow issuers to raise funds for projects with positive social outcomes such as basic infrastructure, affordable housing, microfinance, food security and access to essential services.

According to Refinitiv’s data, Asia (excluding Japan) social bond issuance hit a record of US$19.2 billion in 2020, nearly 20 times the total raised in 2019. Philippines stood out in this arena as the largest social bond issuer (44%) in Asia ex Japan for 2020, followed by South Korea (31%).

Plugging the data gaps

Despite the encouraging growth in sustainable investment, the lack of standardised, transparent and comprehensive ESG data and benchmarks to guide investment decisions remains one of the key obstacles among investors. According to the latest report by the Future of Sustainability Data Alliance (FoSDA), over eight in ten institutional investors globally cite data as the obstacle to effective assessment.

To help address this challenge, FoSDA announced the establishment of a Data Council in February 2021. By bringing together data providers including Refinitiv, S&P Global, Moody’s ESG Solutions Group and other new members, the Council aims to convene global data expertise to act as a much-needed industry and regulatory sounding board focused on establishing consensus on key ESG data issues and needs for a sustainable future. Data is critical to sustainable finance so the obstacles for investors need to be urgently removed.

Sustainability in a post-pandemic world

The COVID-19 crisis has heightened the focus on sustainable investing and underlined the urgent need to address ESG risks. Sustainable investing has made an irreversible leap into the mainstream, and there is greater awareness that robust ESG practices can help companies in Hong Kong, as well as in the broader region, unlock new opportunities and attract new sources of capital in a post-pandemic environment.

With Asian markets poised to recover ahead of the rest of the world, the region’s green finance market will continue to grow and expand in the coming years. To help the region’s sustainable finance ecosystem flourish, greater clarity, collaboration and convergence among regulators, investors and other industry stakeholders are required to tackle underlying challenges and maintain this positive momentum for the long-term.

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Chief Industry & Government Affairs Officer, London Stock Exchange Group and Chair of Future of Sustainable Data Alliance