How Are Green Bonds Funding Climate Resilience and Readiness?
Southeast Asia is acutely vulnerable to the effects of climate change. Increasingly frequent typhoons, floods and droughts, rising sea levels, higher temperatures, and shifting rain patterns are negatively impacting crop yields, biodiversity, forest harvests, and the availability of clean water.
Climate change is not an anticipated threat but a present and real crisis that has already been affecting Southeast Asia. Tropical cyclones, extreme rainfall, floods, loss of biodiversity, temperature increases and rising sea levels are happening with increasing frequency and high intensity. Some are slow-onset events that take place over extended periods of time (such as temperature increases, rising sea levels, and ocean acidification), while others are fast-onset events (such as tropical cyclones, extreme flooding, and landslides).
For that reason many Southeast nations are embracing green investment and most specifically green bonds! Green bonds work just like any other corporate or government bond. Borrowers issue these securities to secure financing for projects that will have a positive environmental impact, such as ecosystem restoration or reducing pollution. Investors who purchase these bonds can expect to make a profit as the bond matures. Thailand and Indonesia are among the countries in the region that have successfully ventured into the green bond market. Thailand raised almost $6 billion from a sustainability bond issuance in 2020—one of the first worldwide ―to finance its infrastructure needs. The bond issuance was the first of its kind by an ASEAN (The Association of Southeast Asian Nations) member state, and generated exceptionally strong demand from investors.
Indonesia is also active in green bond issuance. As of 2021, Indonesia’s green, social, and sustainability bond market stood at $7.7 billion, with green bonds contributing $6.3 billion of the total. Indonesia issued the first global green sukuk—Islamic debt securities—in 2018, and the first green retail sukuk in 2019.But when it comes to green bonds the investors aren't often everyday investors — green bonds are usually sold to larger organizations such as pension funds that can buy bonds in bulk. Green bonds may come with tax incentives such as tax exemption and tax credits, making them a more attractive investment vs. a comparable taxable bond. These tax advantages provide a monetary incentive to tackle prominent social issues such as climate change and a movement toward renewable sources of energy.
BlackRock was the top holder of green bonds, with about $14.5 billion of assets as of November (doubling its year-to-date position) and increasing its market share by about 2% to 7% in 2021.Currently the world's largest green bond issuers are ICBC (China)8bn, Bank of America 6.8 bn, Bank of China 6bn and ING (Netherlands)10bn in Euros. In the U.S., green bonds are typically issued for $10 million to $100 million, though they are frequently used to raise larger monetary sums. Southeast Asia is emerging as a hotbed for sustainable development projects, driven by a need to address environmental challenges and promote long-term economic growth. Green bonds, a relatively new financial instrument, have the potential to revolutionize the way sustainable projects are financed in the region.
China was the largest issuer of green bonds in Asia-Pacific with $66.09 billion, followed distantly by South Korea at $12.57 billion. Japan, Singapore and India were the other major issuers. Asia-Pacific was the fastest-growing region for green bond sales globally in 2021, according to CBI data. Countries in Asia-Pacific may also lean on innovative green finance instruments in their journey toward net-zero in the coming years. Transition bonds, which aim to fund issuers' efforts to improve or reduce environmental impact or cut carbon emissions, may emerge this year. Good candidate companies would be large carbon-emitting industries such as oil and gas, iron and steel, chemicals, aviation and shipping. While Africa has 23% of official climate finance, it has less than 1% of global green bond issuances and is paying more than twice more than similarly rated peers to access markets. For some reason many African nations are being cut out of the green bond potential profits. For Southeast Asia and Africa green bond proceeds would contribute to building resilience against the negative effects of climate change, achieving sustainable infrastructures, developing ecosystems and promoting efficient and sustainable use of natural resources such as water, a sector particularly vulnerable to climate change.
A green economy approach allows all so-called "third world" countries to transition to a greener energy generation pathway and cater to their growing energy demand at the same time, supported by falling renewable energy costs, with solar panel prices dropping by 80% in the last decade and wind energy prices by 45%.U.N. estimates the annual investment gap for renewable energy infrastructure to be between $380 billion and $680 billion. With focused policy interventions on the green economy, Southeast Asian countries have a huge potential to close the financing gap. Five years ago IFC, a member of the World Bank Group, issued the first internationally rated triple-A peso-denominated green bond — the equivalent of approximately $90 million with a 15-year maturity — to support the Philipines capital market and renewable energy.
The bond, called the Mabuhay Bond, sets a precedent as the first green bond — denominated in Philippine pesos — to be issued by a multilateral development institution.