Demand for sustainability-linked bonds seen to increase

Sustainability-related debt issuances are expected to increase as investors and regulators pay more attention to climate and social issues while disclosures on ESG—environmental, social and corporate governance principles—are becoming more available, according to Fitch Rating.

In its ESG Credit Trends 2022 report, the credit watcher’s Sustainable Fitch division said the nexus between environmental and social issues will become stronger as ESG integration becomes more sophisticated and as more disclosures and data become available.

“This can manifest in various ways, be it a greater importance placed on just transition issues and the impact of investment strategies, supply chain evaluations, or the issuance of sustainability bonds that include social and environmental goals,” Fitch said.

“We expect to see a rising level of issuance of sustainability and sustainability-linked debt as investors combine climate and social objectives under single mandates,” it added.

Fitch observed that issuance of social and sustainability bonds reached a total $250 billion in 2020 or nearly three times as much as the amount issued in 2019.

“This compares to growth of about 8 percent in the green bond market from 2019 to 2020, though notably social and sustainability bonds are growing from a lower base,” it said.

In emerging markets including those in Asia, an expected major driver of growth in this borrowing segment is the amply voiced out concerns on “just transition” arising from the potential for economic disruption from climate change.

This buzzword refers to efforts that seek to ensure that the benefits of the transition to a low carbon economy are spread widely, while recognizing the disruptive nature of such a transition, as well as the need to support those that stand to lose economically—be they entire countries or regions, industries, communities, workers or consumers.

This comes as Bangko Sentral ng Pilipinas (BSP) looks at refining its investment tack with a strategic allocation of outlays into ones that espouse ESG principles.

BSP Governor Benjamin Diokno last week said they have started integrating sustainability principles in the central bank’s investment process, with investment of over $550 million in the Green Bond Fund managed by the Bank for International Settlements.

Last November, members of the Executives’ Meeting of East Asia-Pacific Central Banks (Emeap), including BSP, finalized a project to promote investment in green bonds through the Asian Bond Fund 2.

The Emeap believes this initiative will help catalyze further deepening of local currency-denominated debt markets, in particular for green bonds in the region.