It never fails to surprise people that the biggest market for green bonds is China with a total green bonds volume of over $110 billion (Dealogic). Japan, six times smaller than its neighbour, is starting to catch up: In 2018, green issuances totalled $4.1 billion, a 22% increase on 2017 figures, making it the 2nd largest Asia Pacific market after China and – with total cumulative green bond issuance standing at $ 9.7 billion – the 10th largest green bonds market in the global country ratings.
Looking ahead it is safe to assume the geographic "nexus" for ESG investors will be moving towards the East. I was able to get some first hand evidence of this development through a recent series of meetings - organised by NatWest Markets’ APAC Syndicate & Sales teams - with Chinese, Japanese and Korean investors. Four key themes came up in our conversations:
1. Thematic investment strategies: A number of investors, in particular life insurers, pointed out, that they are deploying thematic investment strategies, meaning that their investment choice follows their chosen theme. If, for example, "climate change mitigation" is selected as a theme, then the investor seeks to source debt with clear, measurable and focused benefits in this area. In this example, a suitable investment could be a green bond financing the construction of wind farms in the South China Sea.
2. Currency flexibility: Investors in the APAC region are open for investments in different currencies and prepared to take their money to non-core markets, supporting the growth of smaller green bond markets (such as investments in Thai Baht or Hungarian Florint issuances).
3. ESG recognition is gaining momentum: Despite China’s market leading position in green bonds, the majority of investors acknowledged that the ESG investment approach is still only slowly starting to filter down from the top, but change is in the air. Many accounts have now signed up to the UN Principles for Responsible Investment (PRI) and are urging their front and back offices to consider new investment practices - local governance scandals, such as the misconduct of Nissan's CEO, add further impetus to this. The mobilisation seems to be working already: At one investor meeting 14 staff attended from across their risk, portfolio management and credit teams.
Still, most investors are prioritising yield over green (quite understandable for yield-deprived Japanese accounts) and have not yet translated their ESG ambitions into specific green bond budgets and targets. A typical quote we heard: "If you give me the same issuer at the same return, then I’m happy to take a green label." Also, there is still (healthy) scepticism whether domestic green bonds are always issued with the right intensions. "Some Chinese green bonds are too much of a black box," we heard. Others compared the green bonds markets with the Sukuk market: "Lots of parties are giving opinions, but not sure all are comparable."
However, again, there are clear signs that investors appreciate ESG investments as a financially attractive option: A number of investors especially those, who take a long(er)-term return view, acknowledge that there will be growing demand for ESG-labelled bonds and noted that these bonds rarely get tapped.
In this context, investors mentioned that the public opinion – Korea was highlighted as one example - is shifting: "People are now more interested in how their pension money is being run," is one comment we heard. This shift could help stimulate political leadership, which all agreed is necessary to accelerate ESG bond market growth.
4. Concerns about regulation: Finally, Asian investors voiced concern that the Europeans, at the vanguard of the market, are pushing for "too strict" rules, which could stifle the necessary market growth. In this context, investors cautioned to not stigmatise transition bonds from "browner" sectors or geographies.
