China stokes Asia-Pacific demand for sustainable finance despite rising interest rates, driven by Beijing’s carbon ambitions

Investing in firms and industries to help fund their transition to a low-carbon future is set to become a major theme in 2024, as demand for sustainable finance products in China and the Asia-Pacific region will remain robust despite elevated interest rates, fund managers and analysts said.

Asia-Pacific, a region highly exposed to costly climate change-related events, needs to invest US$71 trillion to achieve net-zero emissions by mid-century, to answer the United Nations’ recent call for faster decarbonisation, according to a study released in April by New York-based international relations think tank Asia Society Policy Institute.

Sectors in need of transition such as building materials, and companies which are looking to lower emissions and raise spending on green tech, will be attractive investment bets going forward, said Brendan Tu, Asia-Pacific head of ESG advisory at UBS in an interview.

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“A more favourable interest rate environment in 2024 can be conducive to increased issuance of green bonds or sustainability-linked bonds,” said Tu. “But we need to find a variety of transition financing to support companies’ decarbonisation initiatives.”

A photovoltaic power generation base in Taizhou, Jiangsu province, China. Photo: Getty Images

Sustainable debt is tied to investments financing the transition to a low-carbon economy, either via funding new or more efficient power generation, or helping companies achieve their decarbonisation targets, said Jakub Malich, environmental, social and governance (ESG) and climate research lead for fixed income at index compiler MSCI.

“Sustainable bonds continued to increase their weight in global bond indexes in 2023, and their issuance held up well relative to the wider bond market, with Asia-Pacific issuance growing faster than the global average,” said MSCI’s Malich.

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Green, social, sustainability and sustainability-linked bonds made up 5.3 per cent of the total outstanding principal amount of the bonds included in the MSCI Corporate Bond Indexes in September-end, compared with 4.4 per cent at the end of 2022.

Meanwhile, issuance of sustainable bonds in the Asia-Pacific region in the first nine months of this year grew 17 per cent to US$172 billion year on year, outpacing the 4 per cent growth recorded globally, according to MSCI.

“The sustainable dimension of bond issuances is becoming a central topic for investors, and – as such – we expect green, social, sustainability and sustainability-linked market share to further increase whatever the interest rate environment,” said Olivier Menard, Asia-Pacific head of green and sustainable finance at Natixis Corporate and Investment Banking.

Asset manager Fidelity International also expects transition finance to be a focus area for sustainable financing in 2024 in the region, said Ellie Tang, director of sustainable investing.

“The impact of climate risks and extreme weather events is increasingly felt and the deadline for net-zero targets is approaching,” said Tang.

Investment firm abrdn believes financing of transition activities will draw investors who are keen to go the extra mile in supporting such corporate plans, said Nicole Lim, ESG investment manager of fixed income at the asset manager.

“Investors are increasingly willing to be more supportive and flexible around companies that demonstrate robust and credible transition plans, taking into account regional and sectoral nuances.

“This will be positive for Asia, where the focus will be on mobilising capital for the climate transition,” said Lim.

In the Asia-Pacific region excluding Japan, issuance of green and sustainability-related bonds raised US$134 billion in the current year to December 11, compared with US$136.7 billion for the whole of last year, according to financial data provider LSEG.

China accounted for 58.6 per cent of this year’s tally and Jennifer Zhang, head of debt origination in China at investment bank Barclays believes this share will continue to grow given “the issuers’ increasing awareness and urge to generate positive ESG benefits”.

Transition finance is set to become a pivotal element in China’s sustainable finance landscape as the current scope and scale of green finance in China is insufficient for achieving the nation’s goal to peak carbon emissions by 2030 and achieve carbon neutrality before 2060, said Daniel Zhi, head of financial services strategy and operation at KPMG China.

“The next few years are likely to see a surge in market demand for transition finance, addressing this gap,” said Zhi.

“The transition of carbon intensive industry in a just and orderly manner is not only in line with the country’s strategic emphasis on energy security and supply chain security, but also in line with the road map for ‘transitioning away from fossil fuels’, an agreement reached at Cop28,” said Siping Guo, Greater China ESG and climate research lead at MSCI, referring to the 28th United Nations Climate Change Conference held in Dubai in the United Arab Emirates, where nearly 200 nations approved a first-ever call for the world to transition away from fossil fuels.

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