In June, IFR Asia invited a panel of experts to discuss the current state of sustainable finance in Asia, its development profile and to address some of the issues it will have to overcome to efficiently facilitate the region’s transition to a net-zero economy.
UBS sponsored the roundtable, which was held in Singapore.
IFR Asia: Lito, what kind of questions are investors asking you at Ayala about ESG, and are you having to spend more time measuring and reporting around sustainability?
Estelito Biacora, Ayala: It is something new to us as well. I think that most of the questions on ESG and sustainable finance are answered by the way we look at it in our company, Ayala Corporation.
Most of the questions are about the use of proceeds (UOP). We are fortunate that we have built a renewable energy platform. Also, questions are related to the core businesses and how we quantify the risk, the emissions, and the interventions that we will be doing in the years to come.
Governance is another critical area in the ESG mindset. It is related to how we report and the ability of the organisation to adjust to the quantification requirements. Even from a ratings point of view, there is a need for organisations to communicate and provide information about ESG efforts in the evolving space of sustainable finance.
Overall, sustainability is now one of major topics of conversations with counterparties and investors. These are supporting the performance of our core businesses, sustainability, and the new businesses we have. One of those new businesses is healthcare. And that is interrelated to the social good.
IFR Asia: Nicole, on the buy side, what kind of questions are you asking issuers about their ESG credentials?
Nicole Lim, Abrdn: Fundamentally, we look at a company’s overall strategy, and really understanding the company. Integrating ESG within this fundamental investment analysis is key.
Our credit analysts and our stock analysts are well equipped to identify emerging ESG risks, and these risks will change over time.
Governance underpins all our ESG assessments, especially in credit. We look at how well a company is run, if the company is run by a management team with a diverse background, with the skills required to manage the business and manage ESG risks that might emerge in the future.
Energy transition is important when it comes to companies in Asia, especially from a fixed income perspective. The Asian fixed income universe has a fair share of heavy emitters, but this gives us the opportunity to facilitate or enable the transition. Transition is a major concern for us whenever we speak to issuers and whenever we look at companies that fit within certain portfolios.
IFR Asia: Alvin, for UBS, you presumably want to check a company’s ESG credentials before dealing with them. What are you looking for?
Alvin Yeo, UBS: From a financing perspective, it’s about understanding the material ESG issues that our clients are facing, and whether they have any plans in place to tackle them.
As a banker, I would also be keen to understand the basis on how those plans are being formulated, whether they are science-based, for instance, or aligned with recognised taxonomies and frameworks.
Another issue relates to ESG controversies. If the company has been involved in ESG controversies in the past, it doesn’t mean we can’t collaborate with them, but we need to understand what has been done to remediate the problem, and what mechanisms have been established to avoid similar incidents from happening in the future.
From a transaction-specific perspective, we would also want to know about management intention – making sure that everyone, all the way to senior management, is on board with the deal specifics, including the commitments to sustainability KPIs or use of proceeds disclosure and reporting.
That’s what makes any deal credible.
IFR Asia: Nicole, from the buy-side point of view, what’s the standard of ESG or sustainability reporting like from corporates in Asia? Is there enough transparency?
Nicole Lim, Abrdn: We’re finding that Asian corporates are getting quite good at responding to calls for transparency.
There are many standards and disclosure frameworks out there, and larger, listed companies are quite aware of what is required when it comes to transparency.
Delivering it is another issue altogether.
There are different standards, not just voluntary but regulatory as well. We also understand the challenges when it comes to disclosure because, as fund managers, we are required to disclose ESG data on our funds as well. These often-competing standards are quite challenging to wrap your head around, especially in a quite limited time span.
So, yes, corporates are well aware of their obligations.
Adoption is another question altogether. And it depends on which pockets of the market you’re looking at.
The big, listed companies will have strong levels of disclosure, but it’s very different in the Asian fixed income markets where we finance a lot of state-owned enterprises (SOEs) and a lot of private entities.
The rate of change with disclosure requirements is rapid but there are areas of the market that need closer inspection.
IFR Asia: Jeffrey, what challenges are there in providing external reviews for ESG finance in Asia Pacific?
Jeffrey Lee, Moody’s: There are many challenges, but I think what's most challenging for us in APAC, as an international external reviewer, is that we have various standards, taxonomies and guidelines for different jurisdictions. There’s no common playbook.
To that point, issuers are also struggling with which playbook to use because some of the local standards and taxonomies differ from the European taxonomy. While Moody’s SPO provides globally consistent opinions, considering both international and local standards, it is challenging for us to provide opinions if issuers are not planning to meet with the international standards and only use local standards. This is especially difficult in markets with deep local currency markets because larger corporations, which tend to tap into the cross-border market, have relatively a good understanding of global investor expectations and the international standards – including the European taxonomy, for example, or Science Based Targets initiative (SBTi) pathways, but small and mid-sized companies, or companies that only finance through domestic markets, have less awareness of international standards.
IFR Asia: Looking ahead, Alvin, where do you see ESG issuance coming from in Asia?
Alvin Yeo, UBS: The market is not in the best of shape. If you look at issuance this year in the ESG-labelled segment, you see supply from governments, including the Hong Kong SAR and the Republic of the Philippines. Policy banks and SOEs have also been relatively active.
But, in the near term, corporate issuance is going to be quite muted – in parallel with the broader market sentiment which is on the weak side. These issuers will come back to the market when interest rates moderate, but until then you will see policy banks, regional banks, and maybe Korean SOEs being active given their frequent borrower status and capital markets history.
Sector wise, the power companies should be quite active, given the need to fund the transition from coal to renewables. You might also see some issuers from new economy sectors, such as electric vehicles, but I guess the question there is not so much ESG credentials but credit considerations as it’s not an established industry the buy side is familiar with.
In terms of products, green bonds have become mainstream in Asia. In the loans market, SLLs are becoming increasingly popular. We have also seen the emergence of certain thematic bonds, such as blue bonds, but the applicability of those products is probably more limited versus green bonds, given the business models followed by corporations in Asia are not naturally aligned for these.
IFR Asia: Are any particular industries or countries seeing a lot of ESG issuance?
Jeffrey Lee, Moody’s: On the cross-border market, it has been weak, but there’s a good pipeline from the Greater China region and Korea.
We’re seeing enormous potential in green loans and SLLs in APAC. Banks have been highly active in that space, converting their plain vanilla lending into sustainability-linked loans. So, we’re expecting more SLLs to come.
On the bond market, we’re seeing more transition-based issuances emerging in APAC, especially in local currencies – in particular, Japan.
The Monetary Authority of Singapore also intends to extend the size of the transition finance market here in Singapore, as well. It’s the same in China where a transition bond pilot programme is running.
IFR Asia: Nicole, for you on the buy side, is there enough variety of ESG instruments in Asia Pacific, or is it too concentrated in terms of geography or industry sector?
Nicole Lim, Abrdn: The market has been relatively soft recently, so it’s difficult to say.
That being said, labelled bonds as a proportion of our total universe have been increasing, which suggests to us that issuing an ESG-labelled bond could have implications in terms of access to financing. Issuers increasingly are expected to have a label, wherever possible, to access a wider investor base.
Is there a problem in terms of sector concentration or geographical concentration? We don’t particularly see it as a problem for now, because we don’t have specific allocation targets for green bonds. A company can be a good, extremely credible ESG leader without necessarily having a label attached to the bond, and I think that’s where fundamental analysis comes in.
The mainstreaming and increase in labelled bonds is positive for sustainable investing, but we don’t just rely on the label for investment decisions. If we believe a company has good credit fundamentals and a strong ESG profile, then whether it has a label or not becomes secondary. The label is an articulation of the sustainability strategy of a company, not a replacement of it.
We hope to see more labelled bonds, especially given the transition needs in Asia, but we can’t discount the fact that investors need to do their fundamental homework as well.
IFR Asia: Lito, as an issuer, how does Ayala Group decide what variety of ESG debt it’s going to take on?
Estelito Biacora, Ayala: We look at the market opportunities for either sustainable finance or traditional issuances.
As an example, from 2019 to 2022 we issued approximately US$1.6bn of sustainability-labelled deals. This route was chosen as the group was growing its renewable portfolio. Two-thirds of the proceeds were allocated to renewable projects and the remainder to social projects.
We also executed a social bond deal in 2022, a private placement the IFC intended to finance our plans to grow our health portfolio, particularly the building of a specialised cancer hospital in the Philippines.
Basically, the choice is also based on how investors view the different types of issuances. At the end of the day, we need to make sure that investment appetite exists before we issue in either format.
On a bilateral basis, we are getting more enquiries and interests from financial institutions wanting to provide the company facilities that are green or social labelled.
I have not experienced anything with a G label. I would like to think that this part of the market will develop given the appetite among banks, financial institutions, asset managers, and pension funds and the various institutional investors for such paper.
The market interest in ESG suits us as an issuer.
Nicole mentioned that ESG issuance can be anchored on credit. Ayala Corporation and its businesses are seen as a proxy for growth in the Philippines, an investment grade country.
For issuers viewed as investment grade, demand from investors for E, S and perhaps G deals will continue to grow. Use of proceeds bonds remain the most common type of ESG instrument, and there are more talks about KPI-linked labels. We are exploring this idea right now on a bilateral basis and we can consider this type of structure for our larger capital markets issuance in the future.
IFR Asia: Nicole, how does Abrdn feel about particular varieties of ESG debt? Are some better than others? Do step-ups or step-downs create headaches for you?
Nicole Lim, Abrdn: The short answer is ‘yes’.
UOP bonds are just more straightforward in terms of greenwashing and regulatory risk. Given the current landscape, we prefer UOP bonds as proceeds are clearly ring-fenced, which is especially important for potentially controversial, high-emitting sectors.
Another reason we prefer UOP bonds is that, within the space we look at, we haven’t seen that many strong SLBs yet.
There are some that look okay, but whether they are good enough to translate to real-world impact, and whether they are sufficiently credible, is another question. It’s hard to get a sense of where we stand in terms of SLBs, especially where the market is currently relatively soft.
Again, if a bond is issued by a company with a strong credit story, if it has its house in order with regards to ESG, then the label and the targets are merely an articulation of that strategy.
It’s in instances where the linked financing represents an inflection point in a company’s drive forward in the transition do you start to get more questions on aspects like history and credibility.
In summation, we prefer clean, green UOP deals, but we would like to see more transition-type SLBs come to market.
IFR Asia: Lito, there’s a lot of work that goes into an ESG issuance. What are the benefits for you? Is it the greenium? Is it high-quality investors?
Estelito Biacora, Ayala: We definitely get the take-up from high-quality investors on green-labelled issuance. In some of our deals, some 70% of the paper was taken up by quality international investors.
Having a wider base of investors, across Asia and in parts of Europe, is one of the reasons that a greenium exists. The increased demand provided by a wider investor base, leads to the potential oversubscription and eventually narrower spreads.
The greenium accruing to issuers does exist but it is still small, and we will have to see how it evolves over time.
Ayala has been fortunate to have worked with multilateral agencies – ADB and the World Bank – and our issuance has aligned with their investment allocation strategy, especially on the climate side. We benefited from that.
IFR Asia: Alvin, you’ve done plenty of ESG deals. Is there evidence of a greenium or other benefits for issuers?
Alvin Yeo, UBS: Yes, I think there is a greenium, although it’s hard to quantify, given pricing also depends on the rarity and credit profile of the borrower as well as the state of the market on any particular day.
If you look at some of the recent ESG-labelled bond transactions, you will see that they are still outperforming – in terms of order-book subscriptions in primary, and in secondary market performance.
You shouldn’t look at greenium on a specific transaction, however, but look at how it accrues to issuers over time, because you’re not just going to be doing one transaction, you’re going to do many. Over time, borrowers with solid ESG profiles and credible ESG strategies would expect secondary pricing to be tighter which would benefit the new issue pricing for primary deals.
Investors are also increasingly vocal about companies in controversial sectors, such as those with exposure to coal, and stating their preference for such borrowers to come to the market with green UOP-labelled instruments where proceeds are ring-fenced against exposure to fossil fuels rather than conventional bonds.
Those deals will continue to come. Companies may eventually have no choice. They need to figure out how to align the financing of their businesses with ESG considerations.
The question around a greenium has been floating around for ages, and I think people have tried to quantify it, but there’s just no clear-cut methodology. It would be more useful for the industry to think about it from the perspective of different stakeholders – including investors and issuers – and what it means for everyone in the long run.
IFR Asia: Jeffrey, do you see evidence of a greenium or other benefits to issuers?
Jeffrey Lee, Moody’s: We have seen that the financial benefits like green premiums are limited, especially when the markets are difficult. It could be more evident for the lending side than in the public bond markets.
However, market participants have also seen non-financial benefits of entering labelled markets, such as communicating how your company is going to transit to net zero. The transition needs to happen. We have all committed, as countries, and as corporations. It’s going to happen and you would need to communicate your transition pathway with your stakeholders. It could be through setting use of proceeds financing frameworks and sharing the kind of eligible assets you’re trying to finance; transition-labelled bonds and what kind of eligible transition activities you are going to finance to get to the next level; and sustainability-linked instruments and how you are setting KPIs, choosing your targets, and explaining how that is in line with your overall group sustainability strategy. You want to transparently communicate these things with your investors, your lenders, and any market participants down the track – because issuing a labelled bond is not just an one-off transaction, rather you want to build trust.
IFR Asia: Nicole, you’ve got the tough question. If there is a greenium, does that mean as an investor you’re willing to accept a lower return for an ESG-compliant instrument? Or is it the other way round: you’re going to want a polluting company to pay more?
Nicole Lim, Abrdn: The answer is: it depends.
We run a range of funds, and, as part of our fiduciary duty, we run the funds based on the funds’ objectives.
That said, for ESG-tilted funds and funds that have impact objectives, ESG obviously weighs a lot in terms of our investment decisions. As an example, for our sustainability funds, we have actively discussed specific companies and their sustainability strategies, and it’s these discussions that determine whether the company, or a bond, falls within our investment universe. We then consider its relative value.
Often, it’s a question of whether we are getting compensated enough for the risk that we’re taking. Oftentimes for us, it boils down to governance. If we believe that a company’s governance structure is lacking to the extent where there will be a credit event, then potentially we will require greater compensation to invest.
So, again, it depends on the objectives of funds, and the severity of the risks.
But regulation is increasingly driving the way we think about sustainable investing. A lot of funds that are exposed to EU regulations now require a lot of work in terms of evidencing how exactly ESG risks are being quantified within the investment process. Over time, the industry will need stronger answers to these questions.
These factors can impact a company’s access to financing. If you are a company that is evidently not displaying a commitment to any form of transition, raising debt could be challenging, especially in this market, where investors are or will be bound by some of these regulations.
So, the answer to the question is: it depends on the funds and the objectives of the funds. Funds with clear sustainability objectives will consider ESG credentials more closely.
IFR Asia: Lito, we’ve talked mainly about offshore markets, but we’ve seen some local-currency ESG deals and some big retail bond issues in the Philippines. How deep is the domestic ESG investor base?
Estelito Biacora, Ayala: There is growing interest in the domestic market. We have seen asset managers looking at ESG funds, fixed income or equity, and international foreign institutions based in the Philippines are looking to allocate capital in the Philippines, for ESG-labelled financing.
Demand is growing – and it will continue to do so – but the opportunity for issuers is still mainly offshore with the large institutional asset managers. It is where you can issue in size.
IFR Asia: Alvin, are you seeing the same thing across Asia Pacific? Do you have to go offshore to raise ESG debt, or are there any local currency markets where demand is becoming deeper?
Alvin Yeo, UBS: Asia’s local currency bond markets for ESG-labelled financing activities are quite diversified and fragmented across the different jurisdictions.
The China onshore green bond market is growing at a phenomenal pace, for instance.
ESG-labelled financings often need to be aligned with international standards to attract demand. In the instances where there is lack of alignment between local taxonomies versus the EU taxonomy, it would be harder – although not impossible – for offshore investors to consider domestic markets.
On the other hand, if you look at the onshore market as a means of plugging the gaps in funding projects, then it is a complementary option to international fund raising.
It’s not so much the depth of liquidity that’s available in the offshore or onshore market that drives ESG-labelled financing in my view. It’s how an issuer can smartly navigate those financing channels to make sure that they can fund everything they want to do, to fulfil their decarbonisation strategies and financing objectives.
There are also other bottlenecks. For some countries where the domestic bond market is not sufficiently developed, then you may find it hard to attract money from that segment of the market on a regular basis.
Investor engagement objectives are important as well when it comes to choosing between onshore or offshore markets. Sometimes, the primary objective of raising financing is to complete a certain green project so one can be agnostic between onshore or offshore markets, but sometimes it’s part of the overall company strategy to tell its ESG story, to engage investors willing to stay with them for the long run. In this context, the offshore market may be better.
It’s a balance. When you consider the offshore and onshore markets, I don’t think liquidity is necessarily the consideration, it’s more specific to the circumstances of a particular company and the financing objectives.
IFR Asia: We’ve talked about the various tools companies in carbon-intensive industries can use in financing the transition, but what are the key challenges in financing transition in Asia?
Alvin Yeo, UBS: The key challenge relates to the providers of capital having difficulty assessing the eligibility of borrowers, as well as the projects that can fit into the transition finance criteria.
Progress has been made in terms of developing taxonomies across various jurisdictions in the region, but governments have not yet fully developed national pathways for decarbonisation.
There are interim solutions that financial institutions and investors can use to find their way around this problem, but having those national-level pathways would help providers of capital accelerate the deployment of that capital.
The second bottleneck is at the corporate level.
While there have been a lot of successful companies, such as Ayala, which have gone a long way in terms of setting long-term decarbonisation strategies and targets, other companies have yet to do so.
It goes back to my earlier point around national pathways. Companies need more guidance on establishing their own decarbonisation strategies. These corporates will need to partner with finance institutions to develop their own decarbonisation strategies and targets that would feed into recognised frameworks for transition finance.
In summary, the key challenge is evaluating eligibility of borrowers or projects, which is not the fault of the financial institutions, or borrowers, or anyone. It just needs time to happen. Governments need to fine-tune taxonomies and accelerate the speed at which they’re developing these national pathways.
Financial institutions also need to do their part, working more closely with their clients to help them understand the landscape and develop decarbonisation strategies and targets that could be used for transition finance in the meantime.
IFR Asia: Jeffrey, what kind of challenges do you see for carbon-intensive companies trying to finance their transition?
Jeffrey Lee, Moody’s: There are plenty of products that they can use: green labelled bonds, SLLs, SLBs, transition bonds and loans.
The biggest challenges that I hear from issuers is that they’re very fearful of being accused of greenwashing. That’s the biggest fear, especially in Asia.
That also works with second party opinions. Issuers are fearful of getting a lower scoring to start with, but what’s important here is that carbon-intensive sectors cannot have a very strong score on day one.
The starting point could be weak. We all know that, but what investors and market participants want to see is the company’s decarbonisation pathway: investing in green and transition activities, as well as setting KPIs, setting targets.
Setting a transition pathway, and how you communicate that with your stakeholders, is important.
To avoid the fear of greenwashing, your eligible categories need to be relevant to your overall pathway. Eligible assets or projects that you’re investing need to support your overall decarbonisation path. For example, if you’re a fossil fuel-intensive company planning to invest in some renewable projects, but most of your investments are still going to the fossil fuel industry, then your eligible assets are not coherent with the overall sustainability strategy. That could be a red flag for potential greenwashing from the stakeholders.
For KPI-linked instruments, if you’re KPI is only covering Scope 1 and 2 targets while your Scope 3 is majority of your total emissions, then your KPI could be less relevant in terms of creating long-term environmental impact. Having relevant KPIs, within the right scope, is particularly important in supporting your transition pathways.
What’s critical is to set a transition pathway and ensure that your financing frameworks support your overall strategy.
IFR Asia: Lito, Ayala Group has done so many kinds of ESG financing. The group’s energy platform, ACEN, has even used Energy Transition Mechanism funding to retire a fossil-fuel asset early. Are there any limitations to ESG finance? Are there any areas with a positive impact that can’t be funded by current ESG finance tools?
Estelito Biacora, Ayala: Ayala Group’s energy platform, executed the Energy Transition Mechanism (ETM) transaction in November 2022. The intention of the financial structure is the early retirement of the coal plant of up to 50 years operating life to half.
The ETM financing enabled the company to use the proceeds to pay off loans and at the same time, use the remainder to invest in renewable projects.
We think we have ESG financing opportunities. One limitation is that businesses may not yet be at the scale to allow wide investors to participate – an example is our healthcare business.
Given the size and the scale, there may not be the economies of scale to warrant a separate issuance, including second-party opinion requirements for the particular business. The similar situation will evolve over time. Maybe there could be a collective investment fund that allows more retail-based participation, and smaller tickets that enable these ESG-related businesses to be funded. Banks, insurance companies, and pension funds, would support and it means extra operational steps.
I think that sustainable finance will evolve over time.
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