Climate-related financial tools in Asia are dominated by China, India, and Korea, and many countries in the region do not take advantage of sustainability bonds at all, but growing regulations and net-zero targets are helping grow the market, according to a report by Janus Henderson.
The report looks at decarbonization in emerging markets with a focus on Asia and measures three metrics, including renewable energy as a percentage of total energy production, climate bond issuance compared with total bond issuance, and net-zero target dates. With China and India being two of the largest carbon emitters in the world, the market takes on more significance, according to the report.
Nearly three-quarters of Asia has set net-zero targets, but the dates vary widely, from 2030 to as late as 2070 in India. Slow progress in the region includes an energy reliance on fossil fuels, restricted access to green financing, and poor frameworks for emissions targets and data collection.
Yet, there has been an increase in government involvement with renewable energy, according to the report. Asia-Pacific is also the fastest-growing market for green debt. The region sold more than $124.5 billion of green debt in 2021, an increase of 128%.
Overall, green and sustainability bonds have leveled out this year after a record-breaking 2021. Still, $34 billion worth was issued in emerging markets in the first quarter of 2022, up 22% from the fourth quarter of 2021 and 13% year-over-year, according to Moody’s.
In further analysis, Moody’s sees net-zero transitions in emerging markets as bringing carbon transition risks, and public-private collaboration is necessary to hit targets. That includes significant financing opportunities.
China has implemented a significant amount of renewable energy, with wind installations increasing threefold from 2019 to 2020 and solar increasing by 60%. The country has also applied its own standards on green bonds, according to the report, and issuers can currently use up to 50% for general corporate activities. While the use of the bonds is a positive sign, Janus Henderson says, it goes against general international guidance that all the funds should go toward sustainability efforts.
Still, China’s involvement in sustainable financing, which includes $199.1 billion in climate-related bonds that far outpaces the rest of the region, could encourage other emerging markets to participate in the financing.
India issued $6.8 billion of green bonds last year, its strongest on record. The Reserve Bank of India is also expected to publish a green financing framework this year, which could accelerate decarbonization targets.
Korea has a net-zero target of 2050, which is fueling green bond issuance, according to the report. The country issued $22 billion of climate-related bonds, the second-highest in Asia. The country is also developing its own sustainability financing framework and has taken steps to align with the EU taxonomy.
Emerging markets in Asia need to balance economic growth and the availability and affordability of renewable energy, the report finds. The market provides an opportunity for bond investors to help companies finance long-range emissions goals and meet international standards.
With growing investment in renewable energy to accelerate sustainable transitions in the region, other opportunities with improved infrastructure and grid networks need to be considered. That could also result in demand for more sophisticated carbon credits so companies can offset their emissions, Janus Henderson says.