On Friday, May 15th 2020, the Climate Bonds Initiative (CBI) held a webinar, providing three regulators a platform to discuss their views on the green bond market. Sean Kidney, the CEO of CBI moderated this discussion and was joined by the Deputy Chief Executive of Securities Commission Malaysia (SC), Datuk Zainal Izlan Zainal Abidin, the Commissioner of the Securities and Exchange Commission (SEC) of the Philippines, Eph Amatong, and the Assistant Secretary-General of the Securities and Exchange Commission (SEC) of Thailand, Jomkwan Kongsakul. We found the discussion timely and very interesting – here are the quick takes.
The Green Bond Market
The Green bond market has experienced rapid growth, with Asia-Pacific being the second largest component after Europe. Total issuance size across Asia currently stands at US$8.1 billion, with Malaysia recording a cumulative issuance of approximately US$1.34 billion in green sukuk as of December 2019.
In Thailand, the launch of the investment governance code in 2017 was initiated to encourage integration of ESG factors in institutional investors’ decision making process. The regulator issued a handbook as a guideline to issuers, and provided incentives such as fee waivers. Public listed companies are required to upgrade their annual reports to the One-report for inclusion of ESG responsibilities disclosures, and a ‘Negative list’ is maintained as mutual agreement to not invest in bad ESG firms. Furthermore, there is a provision of capacity building and flexibilities for SMEs as assistance for the application of the One-report concept.
In the Philippines, the first geothermal green bond was issued in 2014. As of 2019, roughly USD 2bn of green bonds have been issued by local companies (in local currencies onshore and in USD offshore). In 2019 alone there were 7 issuances totaling up to USD 1.4bn. Further observed was the yield compression (yield charged) on bonds that tapped the International Market; the Bank of Philippines Islands (BPI) was able to issue a CHF 100 million Swiss-franc denominated green bond with a negative yield. Additionally, some development banks have programs to issue roughly PHP13billion worth of green bonds within the year, post-Covid-19 Crisis.
In Malaysia, the terminology, Sustainable and Responsible Investment (SRI) was formally defined in 2014, when the SC established the SRI Sukuk Framework and its 5-I Strategy, which paved the way for the first social sukuk issuance (education related) in 2015 and the world’s first issuance of Green Sukuk in 2017; A cumulative total of 10 SRI Sukuk have been issued thus far. The SRI Roadmap was launched by the SC in 2019, with 20 recommendations to develop the market. 2019 also saw the revision of the SRI Sukuk Framework which acclimatized the framework to the current market environment and expanded the list of eligible projects which now includes financial institutions as potential issuers. Further, incentives are provided to investors, issuers and intermediaries.
Impact of COVID-19
Significant issuance of recovery bonds have been observed; China’s 300 ‘Covid-19 bonds’ issued were partially green bonds. These bonds conform with the Green Bond regulations that investing activities must contribute to the community and be aligned with social purposes.
Thailand has a strong pipeline of renewable energy and mega projects (such as low carbon emission in transportation project) which indicates potential growth in Green Bonds and a matching demand and supply as there is excess in liquidity.
Green, Social and Sustainability (GSS) bonds can play a key role in growing Philippines’ broader bond market as it appears to attract a wider group of domestic and foreign investors. There is anecdotal evidence of great compression and over subscription of the GSS bond which indicates that it is a cost-efficient alternative to raise funding while demonstrating sustainability commitment and achieving market differentiation.
While the immediate focus in Malaysia is on economic recovery, a review of projects that requires funding from an infrastructure, rebuilding and redevelopment perspective is imperative as some would be aligned with the Green Agenda which is relevant to Sustainable Financing. There is a capacity to raise USD 700million (approved but not yet issued) Green Bonds and Sukuk immediately or as the need arises to fund those projects.
The ASEAN Capital Market Forum (ACMF) work on Green Finance
In March 2020, the chairs of all securities regulators in ASEAN endorsed the Roadmap for the Sustainable Capital Markets in ASEAN. The plan is to roll out a series of 15 recommendations obtained from this Roadmap. Malaysia has identified and prioritized 6 out of these 15 initiatives.
While the ASEAN Capital Market Green Bond Standards and Sustainability Bond Standards sets an understanding of the disclosure standards and provides a clear guide to Green, Social or Sustainable bonds criteria in ASEAN, the implementation of these standards is at the discretion of each country’s domestic jurisdiction.
Further Regulatory Support
SEC Thailand and Thailand Greenhouse Gas Organization have formed an alliance as part of a government commitment and are requesting PLCs and companies seeking for listing to disclose their carbon emission information on their annual report which will be made available to investors to form part of their investing decisions. The SEC will be issuing disclosure regulations that would form part of the criteria to issue Green Bonds.
Most of the Philippines’ efforts revolve around the basis of informing issuers and investors about the standards and allowing them to make their own business decisions. As commitment to a sustainable future, an inter-agency taskforce was assembled within the government to create a common understanding of the taxonomy of the Green products, Services and standards for government building which embeds the social responsibility criteria in the economic decision making.
In Malaysia a paper on principles for taxonomy issued by Bank Negara Malaysia is being circulated for industry feedback. There are ongoing discussions (with Bank Negara) on how the taxonomy should be put in place – whether mandatory or voluntary – as awareness on Green Projects criteria can be enhanced through taxonomy. However, the notion that developments must be fit for Malaysia’s domestic purpose must be maintained throughout.
Final Words
To avoid deterrence of Green Bond issuance in Thailand, there is provision of technical assistance to issuers during the initial process. The next step would be to further educate investors on the long term value creation of ESG. On a wider perspective, there is a need of increased research (in ASEAN) in tracking the correlation between green bond issuance and stock price bounce; green bonds used as indicators to lower the risk of investors’ portfolios.
Likewise, the Philippines is also emphasizing the provision of guidance on green bonds criteria, disclosure requirements and showcasing the business benefit to investors as well as the provision of education to issuers and investors on the merits of Green products.
Malaysia highlights the immense value of establishing of a facilitative ecosystem. From an international perspective, countries developing this segment should reflect on and prioritize their own internal domestic needs whilst taking into account factors that make local issuances internationally more attractive. A further driving factor would be incentives as it does help to kick start some relatively new market segments. A clear message from Malaysia is that building an efficient ecosystem is key.