Robust appetite for sustainable debt in emerging and frontier markets in the first six months of the year bucked a global trend of declining issuance.
The impact of volatility in bond markets due to rising inflation and interest rates saw global sustainable debt issuance fall to US$645bn in the year to end-June – nearly 15% lower than the same period in 2021, although activity had picked up in the past three months.
By contrast, emerging and frontier markets issued over US$120bn of sustainable debt in the first half of 2022, up from US$100 billion a year earlier.
China topped the list, raising US$73bn in the past six months, followed by Turkey and the Philippines.
According to Eastspring, the outlook is particularly rosy in Asia.
“We expect Asia’s sustainable bond market to continue to grow despite rising rates, heightened geopolitical risks and the potential divergence in decarbonisation trajectories regionally,” said Rong Ren Goh, portfolio manager for the firm in Singapore.
There is an expanding universe in Asia that Goh expects to present increased opportunities and greater diversification for investors. China is typically top-of-mind.
“The world cannot afford to ignore China in the transition to a zero-carbon world. With China accounting for more than a quarter of the world’s overall greenhouse gas emissions, China’s decarbonisation journey matters,” he explained.
As part of this expected continuation of investor demand for China’s sustainable bonds, a viable approach is greater engagement, rather than avoidance.
More broadly, with climate change forecasted to hit Asia the hardest, there is increasing recognition of the value generated from having sustainable growth strategies as well as of the costs of not taking environmental risks seriously.
“Across Asia, we have seen governments and policymakers make a concerted push to catalyse the growth of sustainable/green funding markets across their jurisdictions,” Goh added.
To position for emerging opportunities in the region, Eastspring sees the financial sector as continuing to play an important role in channeling funds towards sustainable activities.
“Issuance of GSS labelled bonds will contribute to efforts in financing sustainable activities, and we expect to see more financial issuers going forward,” added Goh.
Further, with the real estate sector accounting for 40% of global carbon emissions, he foresees a big role for property owners.
“We have seen Reits and property developers in Singapore issue bonds where the proceeds are used to invest in green technology infrastructure to make buildings more energy efficient.”