The role of capital markets in supporting the energy transition and sustainable development in Southeast Asia

Southeast Asia is at the front line of the climate change crisis, with the region’s significant low-lying populations particularly vulnerable to rising sea levels and increasingly regular extreme weather events. Stakeholders across the region are grappling with the complex challenge of managing the transition to renewable energy sources mandated by climate targets and investor pressures, against a backdrop of energy insecurity created by recent geopolitical and economic shocks. Significant investment is required to accelerate the transition, whilst ensuring that current energy demands are met and energy security is preserved.

Given the volatility of the current economic climate, Southeast Asian issuers looking to raise funds should take note of the development of the Association of Southeast Asian Nations (“ASEAN”) green, social and sustainable debt frameworks in recent years and consider taking advantage of the available pools of capital that are specifically targeted at transition-related investment. As reported by the Climate Bonds Initiative in its June 2022 report “ASEAN Sustainable Finance – State of the Market 2021” , the ASEAN green, social and sustainable debt market grew rapidly in 2021, with an annual issuance record of US$24 billion. Other key trends identified by the Climate Bonds Initiative through 2021 in its State of the Market report include:

• The largest share of green, social and sustainability deals originating from the ASEAN in 2021 were “green” (63.9 percent), followed by those defined as “sustainable” (35.5 percent), with the latter increasing 26 percent, as compared to 2020. Total volumes of ASEAN green and sustainability debt issuances in 2021 stood at US$15.4 billion and US$8.5 billion, respectively.
• Non-financial corporate issuers were responsible for 79 percent of the ASEAN green volumes in 2021, while sovereign issuances accounted for 51 percent of the social and sustainability market.
• 53 percent of the cumulative ASEAN green use of proceeds between 2016–21 was earmarked for green or sustainable buildings, and buildings and energy combined accounted for 79.5 percent of the cumulative use of proceeds of green debt (bonds and loans) issued from the ASEAN region during the same period.

Sovereign and quasi-sovereign issuances in ASEAN in 2022

Thus far, 2022 has seen a number of debut green and sustainability bond issuances by ASEAN sovereigns and quasi-sovereigns, as well as existing issuers of sustainable bonds returning to the market. In particular:

• In January 2022, the Republic of the Philippines published its Sustainable Finance Framework, which is aimed at supporting its sustainability commitment to implement the United Nations Sustainable Development Goals set by the United Nations General Assembly in 2015 for the year 2030. In March 2022, the Republic successfully issued its triple-tranche US$2.25 billion Global Bonds, of which its US$1 billion 4.2 percent Global Bonds due 2047 were issued under the Republic’s Sustainable Finance Framework, marking the Republic’s debut sustainable bond offering.
• In June 2022, the Singapore government published a national Green Bond Framework, which lays the foundation for the issuance of green bonds by government entities under the Significant Infrastructure Government Loan Act 2021. The Green Bond Framework is aligned with international principles and market practices and structured in accordance with the core components and key recommendations of the ICMA Green Bond Principles 2021 and the ASEAN Green Bond Standards 2018 and covers eight categories of green projects: (i) renewable energy; (ii) energy efficiency; (iii) green buildings; (iv) clean transportation; (v) sustainable water and wastewater management; (vi) pollution prevention, control and circular economy; (vii) climate change adaptation; and (viii) biodiversity conservation and sustainable management of natural resources and land use. On 4 August 2022, the Monetary Authority of Singapore announced the issuance of Singapore’s S$2.4 billion 3.04 percent Green Bonds due 2072. S$2.35 billion of the 50-year long bond was placed with institutional and accredited investors, with the remaining S$50 million offered to retail investors.
• In June 2022, the state-owned Indonesian Bank BRI reaffirmed its commitment to sustainable financing in Indonesia by issuing its IDR5 billion Sustainable Environmental Bonds I Phase I Year 2022. PT BRI Danareksa Sekuritas, PT Bahana Sekuritas, PT BCA Sekuritas, PT BNI Sekuritas, PT Indo Premier Sekuritas and PT Mandiri Sekuritas were guarantors. The sectors targeted by BRI’s Sustainable Environmental-Friendly Bonds include renewable energy, pollution control, natural resource management, land and water biodiversity conservation, environmental-friendly transportation and climate change adaptation.

The Future

The trends outlined above demonstrate that sustainable finance has become an increasingly popular method of raising funds in the ASEAN, with many such issuances oversubscribed, indicating strong investor appetite for investments in sustainable or green projects or broader sustainable objectives. However, the development of sustainable finance across the ASEAN is inconsistent. While certain jurisdictions, such as Cambodia, are at the very nascent stages of developing their sustainable finance markets, others, such as Indonesia, with over US$7.7 billion in green, social and sustainability bonds issued to date, have established themselves as strong regional frontrunners. Standards and regulations widely differ across the region and harmonization and enforcement of the relevant standards, and development of streamlined issuance processes, must remain a regulatory priority if the full potential of sustainable finance is to be realized.

While green bonds remain one of the more popular instruments to deploy capital to green or climate change-related projects, there has been increasing diversification in the variety of instruments utilized, with sustainability and sustainability-linked bonds becoming more popular in 2021 across the ASEAN compared with the period from 2018 to 2019. Given the scale of investment required to meet transition challenges, no single funding source will solve the shortfall, and issuers should consider all potential funding options available to them.

While the future of bond issuance appears to fall firmly within the context of green, social and sustainability bonds, market participants and investors have started looking more carefully at “greenwashing” issues. As investors become more insistent on uses of proceeds that are more specific and more sustainable than “general corporate purposes”, they will also likely similarly insist on more robust tracking and reporting, which issuers should start preparing for as soon as possible.