Watch: why is ESG fixed income on the rise in Asia?
ESG fixed income is growing strongly in Asia. This is offering opportunities to investors, but is no shortcut for careful and in-depth analysis.
In the next few years, we expect very rapid growth in sustainable fixed income in Asia. Indeed, we are at a tipping point right now. Close to 20% of gross issuance in Asia in 2021 so far has been in green, social, sustainability and sustainability-linked bonds, according to our analysis.
Asian issuers are the largest source of environmental, social and governance (ESG) bonds across emerging markets.
The continued increase in ESG bond issuance will offer greater choice to investors who want to allocate their capital not only to produce financial return, but also toward certain objectives, such as diversity or greening the economy.
In Asia, the appetite for ESG-related bonds continues to be focused on addressing climate change. This overshadowed social bonds until the outbreak of Covid-19 which heightened awareness of social issues like equality and poverty.
We see opportunities from the renewable energy sector and green bonds from property companies.
India is a major player in green bonds, from renewable energy companies in particular, in part due to the country’s supply/demand imbalance. Some Chinese property developers are active in green bond in high yield. Together with renewable bonds, they account for the majority of the high yield green bond market in Asia.
Although lagging green bonds to date in terms of issuance, social bonds are garnering more investor support as issuers increasingly reveal details of how proceeds will help achieve UN Sustainable Development Goals, such as supporting employees’ well-being or reducing poverty.
One of the investment opportunities is to identify names with improving transparency and governance, as well as those with a thoughtful approach to transitioning and managing their climate risks. For example, it looks increasingly likely that it will become harder for coal-mining companies to secure funding going forward, which will result in increased credit risks. In comparison, energy companies with a credible transition framework will be more competitive.
While the ‘E’ and ‘S’ have become more topical, sidelining the ‘G’ is one potential oversight, given it plays a central feature in credit analysis, helping determine the potential for ratings downgrade, or default probabilities. Companies with better governance tend to live up to their environmental and social responsibilities too.
We evaluate the overall ESG quality of a company to gain greater insight. We find there is limited correlation between the issuance of a green bond and the overall sustainability of the company.
Chinese property developers, for example, may issue a green bond with a project-specific purpose. If the company has a large and diverse portfolio of properties, you need to ensure and environmental measures are being applied widely and not just to make one building more efficient.
What are investors’ key challenges in measuring performance, as well as social and environmental impacts?
At the portfolio level, it is not straightforward to attribute the effects of ESG factors to financial return. E, S and G factors are somewhat related, and there are many variables in a portfolio’s financial performance.
We integrate proprietary analysis to identify a company’s sustainability impacts on society and translate them into financial terms. We aim to quantify a company’s “social value” as a percentage of revenue.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.