Singapore’s commitment to issue S$35 billion ($26 billion) of green bonds by the end of the decade will likely give green financing in the region a boost as investors seek sustainable assets.
The green bonds will help meet the demand of impact investors seeking to achieve sustainability targets and deepen liquidity in the sustainable finance sector, market watchers told AsianInvestor.
“It would be a must-buy for a significant number of investors and will tick a number of boxes. Not just from the perspective of giving them exposure to very high-grade paper, but also giving them exposure to a very high-grade paper format which is not really that widely available in Asia,” said Gordon Youl, the Hong Kong head of ESG solutions Asia ex-Japan at Nomura International.
He expects strong demand from major Asian institutional investors such as sovereign wealth funds, pension funds, and insurance firms, as well as US-based and European investors who favour environmental, social and governance (ESG) products such as Asian green bonds for portfolio diversification and in response to the growing ESG trend.
The optimism was shared by Thu Ha Chow, head of fixed income Asia at Robeco who said that local banks in particular would have interest.
"The three major Singapore banks have sustainable finance targets of between S$25 billion, S$30 billion and S$50 billion each up to 2025 in addition to commitment from the sovereign wealth fund. This means that there will be plenty of local demand," she said.
Demand for green bonds picked up after they outperformed conventional bonds when markets became volatile during the Covid pandemic.
For instance, US sustainable bond funds outperformed traditional funds by a median total return of 0.9 percentage points, according to the Morgan Stanley Institute for Sustainable Investing.
In addition, the success of high-grade issuance such as the Singapore green bonds could have a “trickle-down” effect on other sovereigns and corporates.
This would increase the supply of Asian-based ESG investment products, which are currently in short supply, and in turn lead to investors creating room for those investments in their portfolios and deepening market liquidity in the long run.
TRANSPARENCY & GOVERNANCE
Youl said investors consider transparency and governance standards of green bond issuers as important factors aside from being investment grade.
“Asian investors are obviously comfortable with the risk profile of Asia. Frankly, in the case of Singapore, that's not really a concern,” he said.
“The key issue for all investors is going to be what the funds are going to be used for. And the degree of confidence they have over whether those funds are being used for legitimate green or environmental purpose,” he said, adding that these concerns were unlikely to apply to the Singapore green bonds, given the issuer’s strong governance and commitment to sustainable financing.
According to Singapore finance minister Lawrence Wong, the proceeds from the green bonds will be used for green infrastructure projects such as the building of charging points for electric vehicles island wide. The country is expecting a surge in demand as it phases out conventional engine vehicles by 2040 to achieve its net-zero emission targets.
In September 2021, the National Environment Agency raised S$1.65 billion from its first green bond issuance, the proceeds of which have been earmarked to fund sustainable projects such as the Tuas Nexus integrated waste management facility, the first phase of which is due for completion by 2025.
Other potential projects that may tap on the green funding are renewable energy, clean transportation, clean water management, and green buildings.
LEADING THE GREEN PATH
Meanwhile, the Monetary Authority of Singapore has set up a task force to formulate a taxonomy covering green and transition activities and risk management guidelines for financial institutions.
Singapore was “uniquely placed” in the Asean region to be able to closely align itself with the “gold standard” of taxonomies, Youl said, referring to the EU taxonomy. In that same vein, he believed too that greenwashing would not be an issue for the Singapore green bonds.
He said Singapore could provide the leadership in developing good practices for reliable data collection and reporting and verification processes to raise investor confidence in the region where green issuers of other grades and qualities are expected to raise capital in the future.
However, the need for due diligence and second-party opinion could also result in higher costs for green bonds issuers and the cost could be passed on to investors, according to Riad Chowdhury, head of Apac at MarketAxess. “Unfortunately, they still often involve both higher set-up costs and additional annual auditing and reporting. In 2020, we even saw the first green-bond default,” he said.
The United Nations regional office for the Asia Pacific estimates that the Asia Pacific region would require at least $1.5 trillion of annual investments in green and sustainable projects in order to achieve the United Nations’ Sustainable Development Goals by 2030.
Asean would require at least $200 billion of green investments annually through 2030, according to Singapore’s MAS.
"Given the Asian region’s high dependency on fossil fuel currently, tackling this transition for which green bonds is one of the key financings will be a great contribution to these goals. Singapore is in a great position to be a hub for green financing given the commitments and its position as the Asian bond and investment hub, as it now looks to transition into a carbon trading centre," said Chow.
This story has been edited to accurately reflect Thu Ha Chow's pronouns and last name, and a misspelling of MarketAxess.