Asia occupies a unique spot at the intersection of sustainability and finance. It is home to 60% of the world's population, two of the world's top three energy-consuming countries, and a growing trillion-dollar credit market.1 At the same time, 99 of the 100 riskiest cities for environmental and climate-related threats are in Asia.2 In recent years, the region's largest economies have announced timelines toward carbon neutrality, measures to reduce greenhouse gas emissions, and investments in cleaner energy sources, electric vehicles, and other green technologies in a bid to stem climate change.
The United Nations estimates that Asia-Pacific requires an additional investment of US$1.5 trillion annually to meet the Sustainable Development Goals by 2030.3 Reflecting the financing gap and the regulatory push, Asia saw a surge in issuance of environmental, social, and governance (ESG)-related bonds in 2021. These bonds offer opportunities for international investors to gain exposure to a new potential alpha source in Asia fixed income. When the Hong Kong government issued US$2.5 billion in green bonds in 2021, European and US investors cornered a third of the total issuance.4
2021: A Record Year for Green, Social, Sustainability, and Sustainability-Linked Bond Issuance in Asia
Source: JPMorgan as of 30 September 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
This investment environment presents exciting new frontiers. On one hand, capital dedicated toward ESG investments is growing; on the other, opportunities for capital appreciation increase as companies bridge ESG gaps. For now, it is a case of large amounts of money chasing few assets, which could lead to disappointment if investors are not carefully vetting the ESG processes of the underlying businesses they're investing in and the securities selectors they're engaged with.
The integration of ESG factors into investment processes is still relatively new in Asia compared to the US and Europe, given a limited understanding of its benefits and a relative lack of commercial motivation, among other reasons. Yet our experience investing in Asian fixed income for nearly two decades has shown that ESG factors have a measurable impact on outcomes in areas such as credit quality, defaults, and spreads. In times of financial stress, like today, investing with an ESG lens can help fortify portfolios through heightened risk management - and active investing using local expertise and an on-the-ground presence offers the added advantage of a more nuanced approach to identifying risks and opportunities.
This post is funded by Pinebridge Investments
1 Sources: Population: UN Department of Economic and Social Affairs, World Population Prospects 2019; Energy: BP Statistical Review of World Energy 2021; Market Size: JP Morgan, PineBridge as of 30 September 2021.
2 Verisk Maplecroft, "Asian cities in eye of environmental storm - global ranking," May 2021. See: https://www.maplecroft.com/insights/analysis/asian-cities-in-eye-of-environmental-storm-global-ranking/
3 UNESCAP, 2019 https://www.unescap.org/sites/default/d8files/knowledge-products/Economic_Social_Survey%202019.pdf
4 Hong Kong Monetary Authority, 27 January 2021. See: https://www.hkma.gov.hk/eng/news-and-media/press-releases/2021/01/20210127-3/
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