While the fragmentation of the Asian market hurts decarbonization initiatives in the region, recent trends are encouraging.
- While China, India and the Republic of Korea dominate the issuance of climate finance instruments, most countries do not issue climate bonds at all.
- Asia’s varying economic and energy dependence on fossil fuels hinders realistic carbon neutrality targets and decarbonisation strategies
- Stronger policy action is needed to favor renewable energy development projects such as solar PV, wind and hydro in government plans to ease the energy transition and improve financial solutions for decarbonisation.
According to a new study by Janus Henderson Investors, climate finance issuance in Asia is dominated by China, India and the Republic of Korea, while most countries do not use climate finance at all. issuance of climate bonds. Report entitled “Decarbonisation in emerging markets – perspectives and perspectives from Asia» analyzes decarbonisation initiatives in developing countries according to three indicators: the share of renewable energy sources in the total energy balance, the percentage of climate bonds in the total number of bond issues, and the target dates for achieving carbon neutrality. This new report builds on its predecessor, published in February 2022, which found that a relative lack of political ambition and a lack of private sector financing held back the acceleration of decarbonization progress in Latin America.
Asia’s decarbonisation is key to limiting global temperature rise
With China and India the world’s two largest carbon emitters, Asia’s decarbonisation is critical to keeping global temperature increases below 2°C. However, in 2020, the regional level of decarbonization was only 0.9%, which is significantly lower than the world average of 2.5%. This slow evolution is due to several obstacles, including dependence on fossil fuels, limited access to green financial solutions, varying degrees of government control over the market, and poor systems and practices that burden emissions targets and collection of emissions data. While almost three-quarters of Asian emerging markets have set or announced zero-emissions targets, the deadlines range from 2030 (Maldives) to 2070 (India).
However, government commitment to renewable energy has grown across the region, demonstrating that countries of all sizes understand their role. At first glance, countries with smaller populations consume more renewable energy; however, in the context of population, the relative consumption of renewable energy in China and India is increasing dramatically. Renewable energy consumption in the region is driven by hydropower, largely due to historical investment; however, recently wind and solar generation have begun to come to the fore.
In 2021, thanks to a small number of countries, Asia Pacific was the region with the strongest growth in green bond sales in the world. In total, the region sold USD 124.53 billion worth of green debt in 2021, an increase of 128%.
China is taking advantage of the opportunities of the green transition
As Asia’s economic powerhouse and largest carbon emitter, China is driving the regional transition to renewable energy with the support of government policies aimed at fueling an energy revolution. China already produces a significant share of the world’s renewable electricity; its wind installations peaked at 72.5 GW in 2020, nearly triple 2019 output, while solar power grew by 60%. China’s national policy aims to increase the share of non-fossil fuels to 80% of the total energy balance by 2060, with a combined solar and wind capacity of 1,200 GW by 2030.
China has also developed its own standards for allocating and reporting the use of green bond proceeds; currently, issuers can use up to 50% of the proceeds from these instruments for “general” purposes. This is a positive step, but goes against international principles, according to which public revenues should only be used to finance green projects. This difference is one of the main reasons for the imbalance between Chinese and foreign issuers, and it significantly reduces the attractiveness for international investors.
However, China has the necessary margin to become a leading sovereign issuer. The development will send a strong signal of China’s leadership in green finance globally, opening up the country to more foreign investment and likely prompting other emerging markets in the region to follow suit. However, China’s limited capital account liberalization, as well as the state’s dominant presence in some industries, may delay this opportunity.
Other key players in Asia include India and the Republic of Korea
Despite the huge need for green solutions and investment, India’s commitment to green finance remained limited until last year, when the country issued $6.8 billion worth of green bonds, the most profitable issuance since it first went live in 2015. This rapid growth in bond issuance was partly fueled by the issuance of sovereign green bonds integrated into the government’s official borrowing program. The Reserve Bank of India is also due to release its framework for sovereign green bonds later this year, along with a range of fiscal stimulus. This could be the start of a new phase of environmental projects that will hopefully accelerate India’s decarbonisation and energy transition.
The Republic of Korea’s energy sector remains dependent on fossil fuel and energy imports, but the country’s commitment to net zero emissions by 2050 is helping to sell green debt. Similar to the “Catalog of Approved Green Bond Projects” in China, Korea has developed its own framework and taxonomy of green bonds to eliminate “greenwashing” while taking significant steps to align them with the EU taxonomy. The development of clear emissions guidelines complements the government’s call for proposals for the possible sale of offshore green bonds aimed at increasing foreign investment.
Janus Henderson says more investment in hydrogen and more efforts to reduce carbon emissions are needed
Emerging markets in Asia will need to continue to balance economic growth with the affordability and availability of affordable and affordable renewable energy sources. It is clear that bond investors have the opportunity to play a key role in helping companies raise capital to meet long-term issuance targets and international commitments. Over the next decade, hydrogen is expected to become one of the fastest growing alternative energy sources; investing in hydrogen solutions as a low-carbon alternative can accelerate the region’s clean energy transition. It will also be necessary to build more reliable networks to efficiently distribute these alternative energy sources. As the energy transition continues to unfold in the region, it is likely that we will see governments implement carbon regulation programs that will put pressure on private companies to reduce their emissions. Therefore, demand for a sharper carbon credit market is also likely to increase so that companies can buy credits to offset their emissions.
Matt Doody, emerging markets analyst at Janus Henderson, said: “As the factory of the world, Asia uses significantly more energy in its economy than other regions, often coal or diesel. However, most emerging markets in Asia are under-utilizing climate finance solutions, and green bond issuers are a dominant economic force in the region. Reducing greenhouse gas emissions and transitioning to clean energy in these markets requires significant investments in generating capacity that can guide efforts to change the energy balance as well as coordinate regulatory policies. As we noted in our last report, a major challenge facing emerging markets is the ability to create regional frameworks or environmental financing instruments that are not subject to cross-country government blockages. We believe that a more open and realistic dialogue is needed to create solutions that are flexible enough to respond to real local problems and tough enough to hold the region accountable for driving long-term change.”
Ales Kutni, portfolio manager at Janus Henderson, said: “Asia offers a clear opportunity for decarbonisation, as some of its countries face some of the biggest carbon emissions challenges. Although Asia was represented at the start of green bond issuance, it now lags far behind other regions such as Europe or North America. As investor interest in green bonds continues to grow and we begin to recognize new climate finance initiatives such as the Singapore Green Bond Scheme, Asia may be ahead of the rest of the world. In fact, thanks to a combination of government policy support, technological innovation and new financial solutions, the region may well be at the forefront of the next (green) industrial revolution.”