Green, Sustainability-linked Debt Receives Regulatory Support in Asia

Hong Kong, Singapore and Thailand facilitating growth of sustainable bond and loan markets.

Developments this week all point to a major boost to the issuance and development of sustainable bonds and loans in Asia. Three major Asian hubs – Hong Kong, Singapore and Thailand – have signalled their support by launching initiatives to encourage issuance and making proposals for future development.

Hong Kong’s green bond market could be further developed by raising public awareness, reducing verification and certification costs, and adopting homogenous standards, said a report published on Tuesday (24 November) by the Hong Kong Institute for Monetary and Financial Research (HKIMR), the research arm of the Hong Kong Academy of Finance (AoF), in collaboration with Ernst & Young.

Based on a survey of 28 issuers and 20 investors, the report says the green bond market saw a record-breaking year in 2019 in terms of issuance amount, reaching USD 261 billion globally by year-end. In Hong Kong, cumulative green bonds issuance reached USD 26 billion by the end of 2019, with mainland entities accounting for more than 70 percent of the total market.

The survey respondents cited the large number of international investors, availability of supporting policies, solid presence of socially responsible issuers, and transparent ESG information disclosure as the leading advantages of the Hong Kong market.

The report offered suggestions for enhancing the green infrastructure in Hong Kong, encouraging greater participation by market participants, and ultimately accelerating the development of Hong Kong as a leading green bond hub.

Strategies to improve the green infrastructure include improving transparency of ESG information disclosure, supporting responsible investment and government issuance, encouraging convergence towards international green bond practices, facilitating cross-border green bond issuance, constructing green bond indices, and promoting green exchanges.

Hong Kong’s regulators and policymakers have promoted the green bond market through initiatives such as establishment of the Green and Sustainable Finance Cross-Agency Steering Group, helmed by the HKMA and Securities and Futures Commission (SFC), and one of the world’s largest government green bond programmes, with a borrowing ceiling of HK$100 billion.

“Hong Kong’s green bond market is quite mature in terms of its facilities and supporting measures, and follows international standards,” said Edmond Lau, Senior Executive Director, HKMA, at the launch of the report. “The city can become a green bond financing hub for mainland China, particularly in the Greater Bay Area.”

Green issuance supported in Singapore

The Monetary Authority of Singapore (MAS) has announced a new grant scheme aimed at enhancing the ability of corporates to issue green and sustainability-linked loans.

The Green and Sustainability-Linked Loan Grant Scheme (GSLS) aims to help corporates of all sizes by defraying the expenses of engaging independent service providers to validate the green and sustainability credentials of loans.

Specifically, the grant will cover expenses associated with engaging independent sustainability assessment and advisory service providers to develop green and sustainability frameworks and targets, obtain external reviews (including a second-party opinion, verification, certification or rating), and report on the sustainability impact of the loan.

MAS will defray up to S$100,000 of these expenses per loan.

The grant scheme also encourages banks to develop frameworks for green and sustainability-linked loans to make such financing more accessible to SMEs.

It will cover the expenses banks incur to engage independent sustainability assessment and advisory service providers to develop frameworks, obtain external reviews, and report on the allocated proceeds of loans originated under the framework.

The GSLS will be effective as of 1 January 2021.

Additionally, MAS will expand the scope of the existing Sustainable Bond Grant Scheme (SBGS) to include sustainability-linked bonds, effective immediately.

Beyond grant support for pre-issuance costs, which have been covered under SBGS since 2017, the enhanced SBGS will now cover the post-issuance costs of engaging independent sustainability assessment and advisory service providers to obtain external reviews or report for bonds under the scheme.

Sustainability-linked bonds (SLBs) refer to performance-based bond instruments where the issuer is committing to future improvements in sustainability outcomes within a predefined timeline.

Thai proposal for ICMA alignment

In similar news, Thailand’s Securities and Exchange Commission (SEC) has proposed rules and amendments to support the issuance and offer for sale of SLBs, and is now seeking public comments.

The proposed regulations have been formulated with reference to ICMA (International Capital Market Association)’s Sustainability-Linked Bond Principles, released in June, which offer best practice guidance on SLB structuring features, disclosure and reporting.

The proposed regulations include additional disclosure requirements for issuers as well as an obligation to appoint an external review provider to furnish opinions on sustainability performance against predefined sustainability or ESG KPIs and targets.

Presently, the SEC supports Thai firms in issuing green bonds, social bonds and sustainability bonds. While these bonds focus on raising capital for sustainable projects, the advantage of SLBs is that the proceeds are not limited to specific projects and can be used for general corporate purposes.

The SEC proposes to provide a condition allowing for the interest rate paid to investors to increase if the external review finds that the SLB issuer has not met its predefined targets.

The regulator also plans to waive approval and filing fees for SLB issuance, as it does with green bonds, social bonds and sustainability bonds. SLBs shoulder higher costs for issuers compared with regular debt instruments, especially due to expenses for the external reviews, the SEC says.

The consultation is open for comment until 21 December 2020.

This article aggregates information previously published on our sister site Regulation Asia.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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