The member countries of the Association of Southeast Asian Nations (ASEAN) will require additional investment in infrastructure to sustain the rapid growth rate that has been registered in the recent past. However, the fossil fuel-intensive nature of most infrastructure development poses the danger of climate change, underlining the need to shift from carbon-intensive industries to green industries like renewable energy. In catalysing this transformation, the financial sector plays a key role. However, as investors are apprehensive about returns and the financial viability of environment-friendly projects, there exists a huge financing gap. To bridge this gap, Southeast Asian countries such as Malaysia, Singapore and Indonesia have issued green bonds to propel sustainable development. Several banks and private institutions in the Southeast Asian region have come forward to provide funding for clean development projects through this economical and convenient financing model.
Emergence of green bonds: Recent issuances
The Southeast Asian countries are committed to fostering sustainable development; this commitment has been further strengthened by the signing of the Paris Climate Agreement in December 2015. While some countries have sown the seeds for reducing carbon emissions, others have started taking initiatives for the development of environmentally sound projects. This has created a huge opportunity for investors who are turning to the green bond markets for investments.
Green bonds as an asset class are relatively new to the Southeast Asian region but there has been an increase in the number of such bonds issued since 2017. Beginning in April 2017, CDL Properties Limited issued Singapore’s first green property bond for raising $74 million. Following this, in June 2017, Malaysia became the first country to introduce a green Islamic bond called sukuk. The bond was introduced as part of the Malaysia Green Finance Program and its proceeds were to be used to fund a specific environmentally sustainable infrastructure project. The programme is being supported by the World Bank Group Global Knowledge and Research Hub, Bank Negara Malaysia and the Securities Commission, Malaysia. Later, in July 2017, the DBS Group of Singapore issued an international green bond with a five-year maturity period through which it raised around $500 million.
Following suit, Indonesia, in February 2018, hit the international bond market with a $1.25 billion (SGD 1.65 billion) green sukuk, the first sovereign sukuk issue in the world. These sukuk bonds were aligned with the ASEAN Green Bond Standards (ASEAN GBS). Further, in April 2018, Indonesia’s Star Energy Geothermal issued and listed a $580 million amortising green project bond. More recently, in July 2018, Indonesia-based Sarana Multi Infrastruktur, a state-owned infrastructure financing firm, issued green bonds and sukuk worth a combined Rp 1.5 trillion as part of the first tranche of a planned issue of Rp 3 trillion each. It became the first corporate entity to issue green bonds in the country.
Thailand’s TMB Bank is the new entrant into the expanding green bond market. The bank issued its first green bond amounting to $60 million in June 2018. Under the issue, the International Finance Corporation (IFC) was the sole investor and the proceeds so generated will be used exclusively to finance climate-smart projects, particularly renewable energy.
More recently, in July 2018, IFC also issued its first peso-denominated green bond worth $90 million to support renewable energy development in the Philippines. The bond, called the Mabuhay Bond, sets a precedent as the first green bond – denominated in Philippine pesos – to be issued by a multilateral development institution.
These moves are evidence of robust investor demand for green bonds in a rapidly expanding Southeast Asian market.
Green bond standards
Currently, the Association of Southeast Asian Nations (ASEAN) members have either their own green bond standards to follow or no green bond standards at all. The lack of a monitoring mechanism to ensure compliance with climate bonds standards required the introduction of a set of rules for their issue. As a result, in November 2017, ASEAN Capital Markets Forum issued the ASEAN Green Bond Standards (ASEAN GBS). The timely introduction of these standards set the tone for bond issues after 2017. These standards have features that provide the issuers guidance on issuing green bonds and investors with a credible reference point. The standards specify that the issuer must have a geographical or economic connection to the ASEAN region. Further, fossil fuel power generation projects have been excluded from its ambit to mitigate the green washing of projects. In addition, the issuers are required to disclose information about proceeds, evaluation and selection of projects. The ASEAN GBS thus intend to enhance the transparency for issuers of green bonds, reduce due diligence costs and help investors make informed decisions.
Potential of green bond market
The green bond market in Southeast Asia is growing rapidly and is expected to increase further with hefty infrastructure investments required in the region for sustainable development. A recent report by the UN Environment Programme and Singaporean bank DBS forecasts that demand for additional green investment in ASEAN between 2016 and 2030 will amount to between $2 trillion and $3 trillion. This investment is spread across four sectors, namely, infrastructure ($1,800 billion), renewable energy ($400 billion), energy efficiency ($400 billion) and food; agriculture and land use ($400 billion). Indonesia will require the largest volume of green finance. Substantial investment opportunities also exist in Thailand and Vietnam.
Within the infrastructure space, the larger investment opportunities are in power transmission and distribution grids ($700 billion), followed by water ($380 billion), telecommunications ($260 billion), and rail transport ($60 billion).
However, government expenditure alone is insufficient to meet this demand. Assuming that the public sector captures 40 per cent of the total investment requirement, private sector support amounting to between $1.2 trillion and $1.8 trillion will be needed.
Conclusion
The green bond shift in the ASEAN region has already begun. ASEAN GBS, Malaysia’s Sustainable and Responsible Investment Sukuk Framework, and Indonesia’s Green Bond Guidelines are significant milestones for the region. Despite the many advantages, countries like Vietnam and Cambodia among others are yet to embrace green bonds for financing. This slow adoption is mainly because the region is dominated by relatively short-term bank financing that creates impediments for long-term green bonds to take off. Besides, other barriers such as insufficient environmental disclosure from companies, limited information sharing platforms, limited pipeline of commercially viable green projects, and ambiguity over the definition of green projects among other challenges have created difficulty in the scaling up of green bonds. Despite these challenges, financing infrastructure projects with green bonds is highly desirable given that these are long-term, local currency bonds. Further, the sukuk bonds provide investors with a high degree of certainty over its usage and ensure that the funds will not be diverted. Therefore, for sustained development, countries need to leverage this asset class.
