APAC Green Bonds: Promising Long-term Prospects amid Short-term Caution

A recent survey suggests that some asset managers and owners in Asia-Pacific (APAC) are cooling towards green bonds. Despite this, the long-term outlook for these bonds remains bright, as governments across the region continue to prioritize sustainability goals.

The ABF Pan Asia Bond Index Fund (PAIF) commissioned a survey of 600 asset managers and owners that took place in February 2024. The survey found that 43% of respondents believed investing in green bonds was a priority, down from 51% a year ago and projected to increase only slightly, to 44%, in 12 months’ time. Selling intentions rose on this timeline from 12% to 22% and then 33%.

There are a number of reasons behind this drop-off in enthusiasm. Firstly, ‘greenwashing’ has received a lot of publicity over the past year, making some asset managers and owners hesitant to allocate more investment capital to green bonds. On top of this, many jurisdictions are developing their own green taxonomies and standards, making it harder for investors to compare the credentials of individual green bonds and evaluate them as investment prospects. However, many in the industry are confident that these challenges are only a blip in the market’s development.

“The lacking element here is that there's no standardization in terms of scoring,” explains Alaa Bushehri, head of emerging market debt at BNP Paribas Asset Management. “I think it's always helpful when there's a framework around label issuance because that provides more clarity. I do expect this to develop further, moving forward.”

Secondly, the APAC market for green social and sustainability (GSS) bonds has exploded in the past 10 years. In a recent insight, asset manager Robeco noted¹ that issuance of GSS bonds has surged in the APAC region in the three years to 2024; from 2020 to 2021 alone, issuance more than tripled.

Looking at China, the Climate Bonds Initiative said US $131 billion (RMB940 trillion) of green bonds originated² in its onshore and offshore markets in 2023. This made China the world’s largest issuer of green bonds for two consecutive years.

Green Bonds’ Appeal Varies Across APAC

The PAIF survey reveals contrasting attitudes among APAC asset managers and owners towards investing in green bonds. Comparing respondents’ current views with those from 12 months ago and their likely intentions in 12 months’ time, Singapore (in chronological order: 69%, 40%, 33%) and South Korea (43%, 37%, 29%) show a clear decline in interest over that timeline.

By contrast, in China, interest in green bonds rose from 43% to 46% and then 61% over the same period. For Japan-based asset managers and owners, there is also an upward trend overall, falling slightly from 39% to 38%, before rising to 44%.

Trends in intentions by asset managers and owners to sell green bonds over this time period also revealed significant differences between jurisdictions. The most dramatic was between Singapore and South Korea. Over the timeline, the former sees selling intentions go from 7% to 15% and then 42%. For the latter, the numbers are 18%, 37% and 51%, respectively. However, China-based respondents appear more committed to their green bond holdings, with selling intentions going from 11% to 20% before declining to 18% over the period. Japan saw selling intentions rise from 21% to 30% before stabilizing at 31%.

It is worth noting that these selling intentions may reflect the desire of some asset managers and owners to rebalance their portfolios to keep them aligned with their investment strategies, for example by anticipating changes in interest rates and inflation.

Support Remains in Pockets Across the Market

Despite this waning of interest, a number of APAC asset managers and owners continue to support the development of the green bond market (cited by 19% of respondents), with 17% continuing to invest because they foresee the asset outperforming conventional bonds. Meanwhile, 15% are attracted to the market by favorable tax treatment.

The desire to support the development of a green bond market was particularly strong in China, at 28%, followed by Australia at 18%. China’s sustained interest in green bonds is likely due to falling interest rates in that territory (and the subsequent hunt for yield), coupled with well-developed government policies to support green bonds.

Among the least enthusiastic in terms of developing the market was Singapore, at 12%. However, when it comes to investing in green bonds as a strategy for higher returns, Singapore scored top, with 28%, followed by Australia with 25%. This suggests that asset managers and owners in these territories, while cautious towards green bonds at present, could be persuaded by the possibility of unusually high returns.

But the potential for high returns motivates only 10% of Japan-based asset managers and owners and 12% of those in South Korea. Favorable tax treatment was important to 18% of China-based asset managers and owners and 20% of Australian ones.

A Notable Green Bond Issuance

As part of Hong Kong’s Green Bond Program launched in 2018-19, the government issued a HKD 2 billion green bond:

Coupon: 3.8% fixed rate
Maturity: 02/07/2026

Use of proceeds:
1) Waste management and resource recovery
2) Green buildings
3) Water and wastewater management
4) Energy efficiency and conservation
5) Pollution prevention and control
6) Climate change adoption

It is inevitable that the GSS bond market will experience some growing pains but there is a strong possibility that, when the US Federal Reserve (Fed) starts cutting interest rates, it will spur general demand for fixed income assets and green bonds, in particular.

A Sustainable Future for Green, Social, Sustainable, and Sustainability-linked Bonds (GSSSBs)

With governments across Asia looking to reduce pollution, cut carbon emissions and offer greater social support to their populations, the market ‒ and therefore issuance ‒ for GSS bonds will continue to grow and evolve across the APAC region.

Meanwhile, some fixed income asset managers and owners are embedding sustainability factors into their investment strategies. “The sustainability aspect can help to broaden the appeal of these bonds and reach a whole new investor demographic. Having said that, I think it's still early days for green and social bonds being issued in Asia,” says Marie Tsang, ETF investment strategist at State Street Global Advisors.

S&P Global Ratings forecasts that sustainable bond issuance³, which includes green bonds, could rise by 10% this year compared with 2023, to reach US $260 billion. S&P believes that South Korea, Japan and China will account for 75% of green, social, sustainability, and sustainability-linked bonds issuance. Furthermore, it foresees local-currency bonds making up around 70% of GSSSB issuance in APAC. In terms of the type of issuers, the rating agency believes that public-sector entities will remain active in GSSSBs this year, following growth of 55% last year.

Overall, despite a waning of enthusiasm among some APAC asset managers and owners, the signs are that green bonds are still a fruitful prospect in the region.