Financial instruments linked to sustainability will form the next phase in the evolution of green fundraising in Asia, as investors demand companies show their commitment to fighting climate change, according to Swiss bank UBS.

Whereas green bonds designed to fund projects that are environmentally friendly are a “test of the waters” for firms in the sustainable finance space, the more ambitious companies will be looking at issuing sustainability-linked products, said Tasos Zavitsanakis, executive director of the sustainable finance office in Greater China for UBS in an interview.

Borrowers of sustainability-linked instruments need to set predetermined sustainability performance targets that are both relevant and important. If the targets are not met, the debtors will have to bear a penalty in the form of a higher coupon or interest rate.

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“It’s about them demonstrating their commitment, to an extent that it’s an incentive for them to meet their targets. If you don’t meet your targets, you’re going to have to pay a higher coupon or to buy carbon credits,” said Zavitsanakis.

Once companies start putting in place a “credible” transition plan for their business to fight climate change, “naturally [they] can link that to a sustainability-linked commitment. It becomes an evolution,” he said.

Since the first sustainability-linked bond (SLB) was issued in 2019, issuance had reached US$8.2 billion globally last year, according to financial data provider Refinitiv. It has ballooned over 11 times to US$92.9 billion this year.

The issuance of SLBs in the Asia-Pacific region excluding Japan had reached US$11.2 billion as of December 6 this year, with those from China accounting for US$2.8 billion and those from Hong Kong amounting to US$546 million, according to Refinitiv. This type of bond was only launched in the region this year.

Amy Lo, co-head of Wealth Management, Asia-Pacific, and Tasos Zavitsanakis, executive director, sustainable finance, Greater China, of UBS. Photo: K. Y. Cheng alt=Amy Lo, co-head of Wealth Management, Asia-Pacific, and Tasos Zavitsanakis, executive director, sustainable finance, Greater China, of UBS. Photo: K. Y. Cheng>

In January, Hong Kong’s New World Development became the first developer globally to issue a US dollar sustainability-linked bond, committing to use 100 per cent renewable energy by 2026 for its rental properties in the Greater Bay Area. If it fails to do so, it will pay a penalty worth 0.25 per cent of the bond per year that would go toward carbon offset schemes.

The sustainability-linked features are appealing to institutional and family office investors that are “really serious about allocating assets into sustainable kinds of investing”, said Amy Lo, co-head of UBS Wealth Management, Asia-Pacific, in the same interview.

“It’s actually tougher for the issuer to issue the sustainability-linked bond … you have to meet the targets, otherwise you get a penalty.

“We have some investors who are really buying into it, because they feel the company is more serious about delivering what they pitch they are.”

Under the SLB principles published by the International Capital Market Association in June 2020, issuers are expected to set performance targets that are ambitious, comparable, verifiable, consistent with their overall sustainability strategy, and go beyond a “business as usual” trajectory.

“Investors with a sustainable focus … not only look at whether they would get higher returns for those instruments, but also whether their money is really encouraging and incentivising the issuer to do a better sustainable performance,” said Gan Luying, head of sustainable bonds in HSBC’s Asia-Pacific debt capital markets team. She was speaking at Fitch Ratings’ ESG Outlook Conference Asia-Pacific last Wednesday.

Sustainability-linked loans (SLL) with penalties are also gaining traction in Asia, showing that companies are more confident in setting and reaching their climate ambitions, according to Tracy Wong Harris, Standard Chartered’s head of sustainable finance for Greater China and North Asia at a media round table late last month. Common penalties included tiered interest rates, purchase of carbon credits or donations to charities that serve environmental or social causes.

The transaction volume of SLLs for Standard Chartered in Hong Kong grew by over three times in the first nine months of the year, compared to the whole of 2020, according to Wong Harris.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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