Demand for green bonds expected to continue despite COVID-19 setback
Demand for green bonds is expected to continue gaining in traction albeit a dip during the COVID-19 pandemic, as companies place more emphasis on responsible investing and the environment. Money Mind reports.
SINGAPORE: With its lush greenery juxtaposed with sleek metal and glass, the SDE 4 building looks perfectly at home on Instagram. This new addition to the campus of the National University of Singapore (NUS) is not just a building which some see as attractive; it is also the first net-zero energy building in Singapore that was built from scratch. This means it is designed to consume only as much energy as it produces.
The 8,588 sq m building is part of NUS’s growing pool of green projects that is designed to be energy efficient and environmentally friendly.
To fund such projects, NUS recently issued its inaugural green bond, a type of financial instrument designed to have environmental or climate-related benefits. Demand was strong for the 10-year notes, and NUS raised S$300 million through the issuance.
“When we were launching the green bond, it was in May, so that was a period where the financial market was still quite volatile. During times of volatility, there is usually a flight to quality, a flight to safety and NUS being AAA-rated was uniquely positioned to tap the investors’ market and to meet the needs of investors. So in in terms of accessibility to funds and so on, it was not a challenge due to COVID-19,” said Mr Tan Kian Woo, vice president of finance at NUS.
In the broader market, however, the economic impact of the pandemic saw green debt issuance slow down in the first half of this year, with a drop of 26 per cent to US$91.6 billion.
While the first half of 2020 may have been challenging, Mr Cedric Rimaud, who manages the ASEAN programme at Climate Bonds Initiative, expressed confidence in the market.
“We expect that the strong growth of the green bond market will continue, especially in ASEAN where the markets are really strong in terms of accessing capital to finance, and to growth in a sustainable manner. Regulators are fully behind it. Governments are also on the way to issue sovereign securities as well.”
Global efforts to address climate change have remained despite the COVID-19 pandemic, and when the economy recovers, the prospects for green financing will improve too, said Mr Willie Tanoto, an analyst at Fitch Ratings Singapore.
“When the economies recover, the borrowers are going to need credit to rebuild their capacity, in many cases, I think borrowers are going to realise that green financing is in no way less financially competitive than conventional debt. Therefore I don’t think green financing’s prospects have diminished in any way,” he said.
Globally, green bond and loan issuance rose by more than 50 per cent to US$258 billion in 2019 from the previous year. In ASEAN, the total issuance size almost doubled to US$8.1 billion over the same period.
Mr Rimaud noted that such bonds are proving very popular with investors, with companies often receiving large oversubscriptions.
“For example, the BTS group in Bangkok told us that they were able to attract 30 per cent more investors than a normal bond ... The Republic of Indonesia also said that their access to global investors increased as a result of the green sukuk that they issued. So this is very encouraging, because if more investors are interested to buy those bonds, this means that issuers will be able to lower their cost of financing because of this increased interest,” he said.
Other industry insiders said the trend for sustainable financing has not slowed down even with the pandemic.
“There is now a lot of narrative around stakeholder capitalism. The private sector has really woken up. If you want to futureproof your operations, if you want customers to continue buying your products and services, being sustainable is almost a given,” said Ms Yulanda Chung, head of sustainability and institutional banking at DBS.
Within the region, Singapore is taking the lead when it comes to green financing. The country accounted for 55 per cent of the ASEAN green debt issuance in 2019, up from 29 per cent in 2018.
Mr Mike Ng, head of structured finance and sustainable finance at OCBC, noted that sustainable finance has become more mainstream as companies place more emphasis on protecting the environment.
“Trillions of dollars will be required to meet the sustainable development goals. As a bank, we saw lots of green investment opportunities to address the global changes including renewable energy, energy efficiency projects, clean transportation, green buildings and so much more. Many of the transactions we have done in 2020 are from the same clients we have done deals for before. So it’s increasingly evident that once corporates embark on their green strategies, they tend to stay on this journey,” said Mr Ng.
And while investing in green bonds may not be high risk, caution must still be exercised, said analysts. Investors must also guard against the risk of green washing.
“Green washing was a concern at the beginning of the market for investors, because they were not always aware if the projects were truly aligned with a greener future," said Mr Rimaud.
"But since the Paris Agreement has been signed, standards have emerged to exactly define which are the green projects, like the climate bonds standards. This green washing has subsided because the standards that are available are stricter," he added.
For now, amid growing demand for green finance, analysts said that the market can expect to see more issuers like NUS raise funds through green bonds.