Asia-Pacific Poised for Growth in Sustainable Finance Amid Rising Interest Rates

Strong Demand for Sustainable Finance in Asia-Pacific

Despite rising interest rates, the demand for sustainable finance products in China and the Asia-Pacific region remains robust. This trend is fueled by the region’s commitment to transitioning to a low-carbon future, a major theme set to dominate 2024. Fund managers and analysts anticipate continued strong investment in firms and industries aiding in this transition.

Investment Needs for Net-Zero Emissions

To meet the United Nations’ call for faster decarbonization, Asia-Pacific requires an investment of US$71 trillion to achieve net-zero emissions by mid-century. This goal is essential for a region heavily impacted by costly climate change-related events.

Focus on Transition Financing and Green Tech

Sectors in need of transition, like building materials, and companies focusing on lowering emissions and increasing green tech spending, are becoming attractive investment opportunities. Brendan Tu of UBS notes that a more favorable interest rate environment in 2024 will likely boost green bond issuance and sustainability-linked bonds. However, a variety of transition financing is needed to support companies’ decarbonization efforts.

Sustainable Debt and Its Rising Importance

Sustainable debt, financing the low-carbon economy transition, has seen an increase in its weight in global bond indexes. Asia-Pacific’s issuance of sustainable bonds grew by 17% to US$172 billion year on year in the first nine months of 2023, surpassing global growth rates. Olivier Menard of Natixis Corporate and Investment Banking predicts an increase in market share for green and sustainable bonds, regardless of the interest rate environment.

China’s Role in Sustainable Finance

China, accounting for a significant portion of sustainable bond issuance in the Asia-Pacific, is expected to continue growing its share. Barclays’ Jennifer Zhang highlights the increasing awareness and urgency among issuers to generate positive ESG benefits in China. Transition finance is becoming a key element in China’s sustainable finance landscape, addressing the gap in achieving the country’s carbon neutrality goals before 2060.

The Transition Finance Surge and COP28 Impact

A surge in market demand for transition finance is likely in the coming years. This surge aligns with China’s strategic emphasis on energy security and the global agreement to transition away from fossil fuels, as agreed upon at COP28. Siping Guo of MSCI emphasizes the need for a just and orderly transition of carbon-intensive industries in line with the COP28 agreement.