There is growing recognition that the integration of material ESG factors in investing is not only about doing good but can lead to improved investment outcomes in the longer term. This applies to both equity and bond investing. 

However, a key difference between sustainable bond investing versus equity investing is that bond investing is more focused on identifying and mitigating downside risks, while equity investing is more attuned to growth opportunities. 

According to Sustainalytics, a global leader in ESG research and ratings, corporates that consider their impact on the environment and society and have higher levels of sustainable practices are less likely to face controversial incidents that may negatively impact business.

Further, the scope of sustainable investing in the bond universe is wider. Apart from traditional bond securities, the availability of green, social, and sustainability (GSS) labelled bonds allows investors to direct their investments to specific projects and activities that support their ESG objectives. 

ESG considerations are affecting everyone, from consumers to policymakers

In a 2020 global survey done by consulting firm BCG, it was found that 70% of survey participants agreed it is important that climate change is prioritised in the economic recovery after the Covid-19 pandemic. 

The crisis is driving change at the individual level too, with 40% reporting that they intend to adopt more sustainable behaviour in the future. This mindset shift is bound to have ripple effects, expanding from consumer decisions to macro policies.

Governments of the world’s top greenhouse gas emitters are now working on reaching a net-zero emission future. China, currently the world’s largest carbon emitter, has committed to turn carbon neutral by 2060.

It’s not just climate — governance matters too

In our global investor survey conducted in July to September 2021 on Asian fixed income, respondents highlighted corporate governance to be among their key concerns for investing in Asian bond markets. 

This is rightly so, because when corporate governance failures occur, the loss in bond capital values often materialise long before the actual credit rating downgrade or default.

Asia’s corporate governance standards have improved over the years, but significant divergence exists within the Asian region itself. We expect the increased emphasis on environment, social, and governance (ESG) to effect more meaningful changes in corporate governance frameworks across the region. This takes time and given the idiosyncrasies in each market, it is imperative for Asian bond investors to know their markets and credits well and to be dynamic in their analysis.

In Asian markets and cultures, where human relationships are highly important, having local investment teams on the ground that can engage with issuers can go a long way.

Asia offers the opportunity for ESG outperformance

The shift towards sustainable investing has also been gaining momentum in Asia. In Asia, where ESG investing has historically lagged, assets in ESG funds reached US$35.3 billion as at September 2021, up from only US$6.7 billion in 2018.

Asian governments are also increasingly aware that sound ESG practices go hand in hand with long-term economic growth. Various Asian governments are promoting ESG as part of their agendas for economic growth either by supporting the development of regional green finance hubs (Singapore, Hong Kong), promoting green finance products (Indonesia, Taiwan), or nurturing a green bond market (India). 

Singapore’s recently unveiled Green Plan 2030 charts Singapore’s green targets over the next 10 years as the country seeks to advance the national agenda on sustainable development. Meanwhile, Bank Negara Malaysia is looking to implement a green taxonomy later this year which can eventually be used to help differentiate financial institutions based on their support for climate goals.

With Asia’s unique mix of strong economic growth and policy support, we see the potential for ESG outperformance as rapid wealth accumulation and rising ESG investing opportunities intersect.

How does Asia's bond market rise to the challenge?

As policymakers in Asia look to make infrastructure more climate resilient, and companies continue their decarbonisation journey in the new post-pandemic world, Asian bond markets will play a critical role in helping to finance these initiatives. 

We expect the growing issuance of ESG-aligned bonds in Asia to finance the structural shift towards areas like renewable energy and green building, which will provide investors with greater diversity and opportunities.

As at end September 2021, Asia’s sustainable bond market had an outstanding stock of US$388.7 billion, accounting for nearly 20% of the global sustainable bond market.

In 2020, Asia Pacific’s issuances of green, social, and sustainable bonds made up 22% of global issuance, as shown by the chart below.

Green, social, and sustainable bond issuances in Asia Pacific continue to grow

Asia has a big role in decarbonising the global economy. With China alone contributing close to 30% of global carbon emissions, it is not surprising that China accounts for close to 70% of the region’s green bonds outstanding, followed by Japan (10.5%) and Korea (10.5%). This can be seen from the following chart.

Outstanding green, social, and sustainability bonds in Asia

China already accounts for one-third of global investments in decarbonisation, although the path towards carbon neutrality will be challenging, as much of its existing energy infrastructure is heavily reliant on coal. China’s efforts to build green financing channels to fund the massive investments required to build a green infrastructure will probably be accompanied by carbon credit offsets.

There has also been growing investor interest and issuance in social and sustainability bonds in Asia to help finance health services and poverty alleviation projects post the Covid-19 pandemic. Sustainability bonds are appealing because proceeds can be used for both environmental and social objectives, giving the issuer greater flexibility. 

On the other hand, there is less clarity surrounding how to measure and assess the impact of social bonds. The total amount of social and sustainability bonds outstanding in Asia is US$50.6 billion and US$59.6 billion respectively, with Japan and Korea being the biggest issuers of such bonds. 

The Asian Development Bank is seeking to accelerate the development of the social bond market. The expanded scope of social projects to include pandemic support spending under the Social Bond Principle framework will help to grow this market.

Investors can be rewarded for doing good

There is an opportunity for investors to be rewarded while doing good. According to a study done by JPMorgan, the cost-of-debt differential for the top-ranked Asian investment grade corporates versus the lowest ESG-ranked corporates has averaged about 23 basis points since 2015. 

It is expected that the cost-of-debt differential would widen with time as investors become more ESG aware in the region, making investments in Asia’s sustainable bond market a potentially rewarding venture for early investors.

Leveraging on international standards and working with reputable international agencies, including the International Capital Market Association and the International Finance Corporation, will help accelerate the development of the sustainable bond market in Asia, providing investors with greater diversity and opportunities. 

This will be an evolutionary process as Asian policy makers continue to make incremental changes to regulations in response to Asia’s unique considerations. 

Given Asia’s later start, the path to net zero is likely to be steeper and more ambitious than Europe’s. However, this also suggests that the potential impact could be greater.

Read more: Asian bonds set for ESG shine

‍This article was originally published by Eastspring in March 2022.

‍Eastspring Investments, part of Prudential plc, is a global asset manager with Asia at its core. Eastspring is supported by 300+ investment professionals across 11 major Asian markets and distribution offices in North America and Europe, with a total of US$222 billion assets under management (as of 30 June 2022) on behalf of institutional and individual investors globally.

Endowus has three funds from Eastspring (as of 7 Sept 2022), including the Asia Sustainable Bond Fund and the Singapore Select Bond Fund.

Get started building your own portfolio with these funds on the Endowus Fund Smart platform. Also, learn about Endowus' ESG portfolios here.