What are the prospects for the ASEAN sustainable finance market?

The ASEAN sustainable finance market has continued to expand in the aftermath of COVID-19. 

Green and sustainability themes dominate in the largest ASEAN-6 economies. Two regional key trends can be observed in 2021: (1) the dominance of the green theme, but with the increasing market share of sustainability instruments in the GSS markets; and (2) the exponential growth of sustainability-linked instruments.

Local currency capital markets are at different stages of development across member economies, but are generally growing. The current level of development of the sustainable finance market varies greatly by country, but legal and policy frameworks are becoming more supportive of sustainable finance, with the notable addition of a draft ASEAN Taxonomy in 2021.

While supply has increased, demand for sustainable financial instruments in ASEAN is also growing, from multiple sources. Greater investor understanding of climate risk, the enthusiasm to explicitly align sustainable investment with the SDGs, new investment product launches, and broadening market presence have all contributed to demand. Several regional policies and actions suggest continuing progress to promote local currency sustainability finance in ASEAN.

Issuers, investors, development finance institutions (DFIs), regulators, central banks, policymakers, and stock exchanges each have a role to play in the creation of a credible, sustainable finance market in ASEAN. Climate Bonds suggests the following actions:

First, Sovereign GSS Bonds can underpin thriving local markets. Sovereign GSS bonds support government climate action plans, create accountability, and attract private capital to sustainable projects. Sovereign GSS bonds are a proven catalyst for green market creation, acting as large, liquid benchmarks; lynch-pin investments for dedicated funds; and encouraging the development of the necessary infrastructure, such as a community of local verifiers.

Second, identification of the climate-aligned universe can increase potential investments. The unlabelled climate-aligned bond universe can extend the opportunity set for investors. Identification of this portion of the market also highlights opportunities for issuers to refinance maturing debt with labelled bonds.

Third, grant schemes can help with the costs. Regulators and central banks can use grants to encourage sustainable finance flows, for example by sponsoring the costs associated with obtaining an SPO. Singapore has set a precedent for this, which others could follow.

Fourth, policymakers must lead by example. Green/sustainably projects in the real economy should be encouraged through policy and institutional changes. For example, ambitious energy standards for buildings, or the introduction of zero emissions zones or vehicle charging stations in town centres through urban planning. Public procurement should have a sustainable focus, e.g., new public buildings should include maximum energy efficiency, public sector vehicles should be zero emission, and public construction projects should integrate climate resilience and natural capital solutions.

Fifth, blended finance solutions attract a diverse pool of investors. DFIs and multilateral development agencies can partner with the private sector to encourage more investors to support sustainability initiatives through the de-risking of green and sustainable projects.

Sixth, central banks can mobilise building blocks better. ASEAN central banks must use their post-pandemic recovery toolkits to protect member states from future systemic risk arising from climate change.

Seventh, local stock exchanges can increase visibility and support market integrity. Dedicated GSS bond segments on stock exchanges with reference information on green and sustainable assets and projects; indices to define the investible universe and enable the construction of ETFs and other derivatives.

Eighth, credibility is key to mobilising transition finance to support decarbonisation in ASEAN. Key stakeholders from both the public and private sectors should be engaged to foster a common understanding of transition concepts that is credible. This should include the development of national and/or sector-specific decarbonisation pathways in the ASEAN context that are both transparent and science-based.