SINGAPORE - Green bonds are gaining traction in the financial markets and a boon for potential issuers eyeing the environment-friendly security. But what will drive issuers to sell green bonds are the issuance cost and price.
“The single most effective incentive to issue a green bond is one of cost and price,” says James Cameron, HSBC managing director and co-head of infrastructure and real estate group, Asia-Pacific during a panel discussion at The Asset 11th Asian Bond Markets Summit in Conrad Centennial Singapore.
For now, green issues have no apparent pricing advantage over straight issues. Issuing a green bond also can be more expensive given the hoops issuers have to overcome to market a security green. Ongoing monitoring of green projects also adds to the cost.
From the point of view of investors, pricing green bonds appear broadly neutral compared straight issues. As there are fewer green investors than in a straight security, closing a green bond deal at attractive prices can be a struggle.
Noritaka Akamatsu, senior advisor of sustainable development and climate change department at Asian Development Bank raises the same concern during his keynote address to participants of the bond summit earlier today. "(If) green bonds do not necessarily give low cost funding for issuers, how do we encourage green investment?" he asks.
Market development and integration remain key pillars for the regional bank. Akamatsu cites the possibility of tapping retail demand for green bonds with the use of technology as in the case in Kenya, East Africa's largest economy, that tapped green investment support from the retail market with the use of mobile phones.
Cameron admits the green sector remains a nascent market. But interest among investors is growing. “There is increasing investor appetite for green bonds," cites Cameron, despite tough market conditions and high volatility in markets.
Globally, green bonds raised US$60 billion in 2016. China and India issuances are driving that growth in Asia. More importantly, a number of the issuances from markets including China are aligned with the widely-recognized Green Bond Principles (GBP).
But more needs to be done to boost green bonds’ role in Asian financial markets. Providing tax incentives for issuances can help with pricing. Keeping the issuances aligned with GBP and improving transparency in issuances are also key solutions.
“Asset managers in Europe are reporting the proportion of their investments that are green. In Asia, we don’t see that yet," says Ricco Zhang, director, Asia Pacific at International Capital Market Association.
"Quite few issuers claim they are issuing green bonds, but are not complying with GBP," adds Zhang. He cites a need among issuers tapping the green bond market of a third party – "a body that tells the market their bonds are green enough."
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