By Armida Salsiah Alisjahbana, United Nations Under-Secretary-General and Executive Secretary, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)
A substantial amount of financing is required to achieve the Sustainable Development Goals (SDGs). Mobilizing such a large amount requires creative alternatives to traditional forms of financing and long-term commitments to implementing them. Green, social, sustainable, sustainability-linked and other such labeled bonds, such as transition bonds, are together named GSS+ bonds. They are increasingly being deployed to help countries mobilize finance at scale to achieve their SDGs and Nationally Determined Contributions (NDCs) under the Paris Agreement. We set out the main trends and opportunities for the Asia-Pacific (APAC) region and suggest potential recommendations for the way forward.
- Closing the financing gap
Halfway into implementing the 2030 Agenda for Sustainable Development, countries face large divergences between financial needs and availability, which risk undermining efforts to achieve the SDGs on time. The gap to reach the SDGs in developing countries increased to $4 trillion annually after 2020—up from $2.5 trillion pre-pandemic1. The OECD (Organisation for Economic Co-operation and Development) has estimated that shifting less than 1 percent of global finance could fill this gap2.
Efforts to transition to low-carbon economies must also be ramped up rapidly. The Sharm-el-Sheikh Implementation Plan agreed upon at COP27 (27th Conference of the Parties to the United Nations Framework Convention on Climate Change) in 2022 revealed that between $4 trillion and $6 trillion is required per year globally to transition to a low-carbon economy. However, there are barriers to enabling more capital for climate action, especially within the context of increased economic vulnerabilities and indebtedness facing developing countries. For developing countries, the estimated financing gap to meet their Nationally Determined Contributions (NDCs) is nearly a staggering $5.9 trillion for the 2023-30 period3.
Rapid systemic changes are needed. In Asia and the Pacific, the challenge of decarbonizing the economy in a socially equitable way requires recognition and willingness by all countries to transform policies, regulations and financial systems. Delivering this transition will involve engaging governments, central banks, commercial banks, institutional investors and other financial actors to act rapidly to address this gap. Within this context, financing instruments such as GSS+ bonds can play a large role in overcoming the financing gap by ensuring finance is specifically used for green, social and other objectives.
- The rapid growth of GSS+ bonds in Asia and the Pacific
GSS+ bonds allow issuers to specifically raise financing for projects with explicit climate and sustainability uses, performance targets and/or objectives. By linking capital raised to explicit commitments toward people and the planet (either through proceeds or organizational-level targets), GSS+ bonds are a critical sustainable-finance instrument in meeting the SDGs. Despite the challenging macroeconomic environment, driven by the energy crisis, the COVID-19 pandemic and last year’s interest-rate surge, the sustainable segment of the fixed-income markets as a whole in Asia and the Pacific showed resilience against declines in global bond markets4. Additionally, maiden issuances in the region continued to grow, with four countries issuing GSS+ bonds for the first time between 2021-22, while more countries, including Mongolia and Cambodia, have or are expected to debut GSS+ bond issuances in 2023.
Note: The data labels show the total GSS+ bond issuances for the following countries: Armenia, Australia, Bangladesh, China, Fiji, Georgia, India, Indonesia, Japan, Kazakhstan, Malaysia, New Zealand, Pakistan, the Philippines, Republic of Korea, the Russian Federation, Singapore, Thailand, Türkiye, Uzbekistan, Viet Nam. It shows annual issuances and includes sovereign, financial and non-financial corporate and other public-sector issuances.
Globally, GSS+ bonds represent a growing fraction of the overall bond market, reaching around $3.8 trillion by the end of 2022—including both sovereign and corporate bonds (around five percent of the global bond markets)5. In Asia and the Pacific, the market for corporate and sovereign GSS+ bonds grew to around $206 billion by the end of 2022, a three-fold increase compared to 2019. Of these, green bonds have dominated the market ($113 billion), followed by social bonds ($54 billion), sustainability bonds ($27 billion), sustainability-linked bonds (SLBs) ($8 billion) and transition bonds ($3 billion). As of December 2022, 22 countries in Asia and the Pacific had issued GSS+ bonds to finance climate action, promote a just transition and women’s empowerment, protect ocean and marine assets and deliver the Sustainable Development Goals, showing the growing interest of governments and investors to signal their commitments to sustainability. Of these, China, Japan and the Republic of Korea hold the lion’s share, with 78 percent of the GSS+ bond issuances, although developing countries, such as India, Singapore, Indonesia, the Philippines and Thailand, reached more than $65 billion in GSS+ bond issuances over the period 2015-22.
Note: Figures show cumulative values across countries for the period 2015-22, including sovereign, corporate and other public-sector issuances.
The flexibility of GSS+ bonds allows issuers to highlight their commitments to and progress made in their sustainability objectives and diversify their investor bases by engaging a wider range of investors with green and social objectives integrated into their investment frameworks. And it enables issuers to unlock further unrestricted financing. In addition, some GSS+ bonds’ longer-term nature makes them an attractive solution for addressing long-term SDG-financing requirements.
In Asia and the Pacific, the share of sovereign and other public-sector issuances grew rapidly between 2019 and 2022, sending important signals to the market about the commitments and direction of governments toward sustainability and climate goals. In addition, the uptake of local-currency issuances of GSS+ bonds is a promising sign of the increased appetite of local investors and the potential to expand access to these markets by local issuers. Although sovereign credit ratings can affect the cost of GSS+ bond issuances, few developing countries have, nevertheless, successfully issued sustainable-finance instruments without investment-grade ratings. At the same time, countries with less-developed financial markets, such as Cambodia and Viet Nam, still issued maiden green bonds, suggesting that countries can leapfrog traditional phases of financial-system development to accelerate their journeys toward sustainability. With regulators, shareholders and investors striving for environmentally and socially positive changes through improved disclosures, reporting, incentives and regulations, the demand for GSS+ bonds is expected to hold strong in the coming years.
- Increased appetite for sustainability-linked and transition bonds
Although green bonds dominate the GSS+ bond-issuance market in Asia and the Pacific, sustainability-linked bonds (SLBs) and transition bonds are emerging as additional critical sustainable-financing instruments, particularly for companies in hard-to-abate sectors that can use SLBs and transition bonds as alternatives to more constraining financing instruments.
Sustainability-linked bonds do not earmark proceeds for specific projects or expenditures. Instead, the issuer commits to meeting predefined measurable targets (key performance indicators, or KPIs) related to the climate, SDGs or broader sustainability goals. In practice, if these targets are not met, the borrower must increase coupon payments to investors. Sustainability-linked bonds thus play a key role in encouraging companies to make sustainability commitments at the corporate level, particularly by aligning their portfolios to the SDGs or Paris Agreement. For businesses in economic sectors with large issuances of green bonds, such as utilities and financial services, SLBs represent complementary instruments to other sustainability-financing instruments.Sustainability-linked bonds in Asia and the Pacific have grown rapidly since 2021, with issuances from 11 countries by the end of 2022, despite a small decline in 2022 compared to 2021 volumes (to $8 billion from $9.58 billion), similar to the modest decrease observed in global markets6.
Transition bonds form another new class of debt instruments to fund a company’s move toward reduced environmental impacts or lower carbon emissions. They are often issued in industries with high greenhouse-gas (GHG) emissions that would not normally qualify for green bonds, such as large carbon-emitting industries (oil and gas, chemicals, steel and iron, aviation and shipping). The nascent transition-bond market is relatively new compared to other GSS+ issuances, but the recent issuances by Japan, China and Hong Kong in 2022 indicate there are promising signs of change. As the region accounts for almost half of the world’s GHG emissions, transition bonds hold strong potential to finance the energy transition and phase-out of coal.
Overall, the rise of SLBs and transition bonds signals much-needed momentum for greening high-emission sectors and aligning hard-to-abate industries with global efforts toward net zero. However, the increased flexibility also highlights the imperative to mitigate the risk of greenwashing, particularly due to the varying ambition levels of the SLBs’ targets. In this context, to reassure investors, the use of independent external auditors verifying the alignment of the issuances with international standards can be a critical instrument to overcome these concerns more systematically.
- Developing robust project pipelines
Despite increasing demand for green projects, the lack of bankable projects in national pipelines remains a critical barrier to issuing more GSS+ bonds that direct financing to such projects. Green projects, particularly those focused on adaptation, may involve high upfront costs and longer terms for returns. On the other hand, financiers face a wide range of risks during this interim period related to multiple factors (country-level, industry-related, macroeconomic-environment risks). In addition, the lack of sound policy and regulatory frameworks, especially in emerging fields such as renewable energy and green technologies, further adds to the challenges, highlighting the critical roles governments can play in laying the groundwork for more conducive environments to build investment-ready pipelines.
For governments, developing a pipeline of projects that meet the bankability needs of the relevant investors, as well as engaging with these investors, is often a challenging process. Secondly, the authorities may have to conduct adequate assessments to determine which projects should be prioritized. This requires significant institutional capacity within ministries, often lacking in less-developed markets.
In this context, building a bankable pipeline of project opportunities at a national level requires a whole-of-government process to coordinate standards, sectors and investor outreach. This should fit the volumes, scales and risk-return profiles that interest multilateral, public and private investors in GSS+ bonds and ensure that the right priorities are integrated into the pipeline.
- Aligning private finance with climate objectives and the SDGs
In addition to projects, private finance must invest in GSS+ bond markets on a much larger scale to bridge the existing gap. Private investors should be engaged for advice from project inception to communicate their preferences on risk, return, ESG standards, corporate governance, climate and social impacts, regulatory compliance and all other aspects of the transaction.
On the other hand, private actors must redefine how they engage with climate and sustainability targets by committing to credible net-zero targets and adopting suitable transition plans with interim targets, thus driving action within the real economy. This requires more collaborations and partnerships between commercial investors, development financial institutions (DFIs) and business and/or project developers at the pre-investment stage.
The Summit for a New Global Financing Pact held in Paris in June 2023 delivered a sense of growing momentum to deliver a “transformation, not reform” of the global financial system, with mounting pressure on multilateral development banks (MDBs) and developed countries to fulfill their promises to provide climate finance in developing and climate-vulnerable countries. Private finance is poised to play a critical role through the massive reallocation of private capital toward climate objectives, but it must urgently address the growing demand for increased transparency and improved measurements of environmental impacts.
- What policymakers and regulators can do to accelerate GSS+ bonds
To encourage private investors to invest at scale in GSS+ bonds, decisive action is needed by policymakers and regulators to encourage private finance to adopt credible net-zero commitments. Reducing obstacles to scaling up financial flows requires clear signaling and government support, including stronger backing from public finances, to lower the real and perceived regulatory, cost and market barriers and risks while improving the risk-return profiles of investments. Policymakers need to develop credible NDC financing plans to achieve sequenced NDC targets that are progressively ambitious. Adopting policy incentives and more conducive taxation regimes toward the net-zero transition is another critical element to reducing risks and allowing investors to shift toward more sustainable market segments—thus expanding GSS+ bonds and enabling more private finance.
Regulators must act decisively to manage the risks climate change poses to the financial system while at the same time shifting capital toward sustainable and green objectives aligned with the SDGs and NDCs. Sustainable-finance roadmaps, sustainable-finance taxonomies, green-bond frameworks and other sustainable-finance initiatives are critical tools to help direct investment toward national sustainable and green priorities and reveal future directions to the market—thus encouraging more GSS+ bond issuances.
Regional cooperation on data, cross-border challenges and aligning investment norms through common taxonomies or common regulatory approaches can work to level the playing field between countries and reduce arbitraging opportunities. Importantly, regional cooperation can allow less-developed countries to learn from the lessons of other policymakers and share best practices, which ESCAP (United Nations Economic and Social Commission for Asia and the Pacific) can further support.
Comprehensive action is thus urgently needed in the region. In this vein, ESCAP’s forthcoming report in October 2023, called “Sustainable Finance: bridging the gap in Asia and the Pacific”, aims to contribute to a robust and informed debate among member states about the challenges, opportunities and recommendations for policymakers, regulators and private finance to bridge the gap in sustainable finance. It outlines a series of recommendations on key measures to accelerate actions and changes in the sustainable-finance market and brings greater clarity regarding the implications and benefits of various policy, regulatory and private-finance decisions. ESCAP has also been supporting Asia-Pacific countries, including Cambodia, Sri Lanka and Bhutan, to advance their green- and social-finance agendas, including by developing sustainable-finance roadmaps, green- and sustainability-bond frameworks and capacity-building on GSS+ bond issuances. ESCAP stands ready to work with Asia-Pacific countries and support them in their efforts to achieve the SDGs and transition to low-carbon and net-zero economies.
1 United Nations Conference on Trade and Development (UNCTAD): “World Investment Report 2014: Investing in the SDGs: An Action Plan,” 2014.
United Nations Conference on Trade and Development (UNCTAD): “Closing investment gap in global goals key to building better future,” September 23, 2022.
2 Organisation for Economic Co-operation and Development (OECD): “Global Outlook on Financing for Sustainable Development 2023: No Sustainability Without Equity,” November 10, 2022.
3 United Nations Framework Convention on Climate Change (UNFCCC): “UNFCCC Standing Committee on Finance First report on the determination of the needs of developing country Parties related to implementing the Convention and the Paris Agreement,” 2021.
4 Climate Bonds Initiative (CBI): “2022 Market Snapshot: And 5 big directions for sustainable finance in 2023,” January 30, 2023.
6 Climate Bonds Initiative (CBI): “Sustainable Debt: Global State of the Market 2022.”