Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Germany
Hong Kong
USA
Switzerland
Singapore
United Kingdom
With the growing enthusiasm for sustainable investment themes, investors, especially in the Asia Pacific (APAC), are turning to impact bonds. As of June 2023, the market for APAC impact bonds had a valuation of $1.09 tn, accounting for 25% of the global issuance, according to FTSE Russell. Also, reports indicate that the APAC impact bond market, launched after North America and Europe, outpaced its North American counterpart by 2017.
All in all, impact bonds encompass green bonds, social bonds, sustainability, and sustainability-linked bonds. They empower businesses to finance ESG initiatives and follow investment guidelines for green and social causes. Unlike regular bonds, their proceeds are utilised for sustainability or social causes.
The issuers of social impact bonds are usually non-profit organisations that lack the creditworthiness to borrow. Hence, social impact bonds allow them to raise private investment. Reducing inequality, enhancing elderly care, funding sustainable energy, or improving public transport are some of the projects that raise capital through impact bonds.
China, South Korea drive growth in APAC impact bonds
The market for impact bonds has surged in recent years, and the trend is likely to continue. The increased issuance of APAC bonds is led by China, followed by South Korea and Japan.
A report by the Intercontinental Exchange suggests that in 2022, China outdid France and became the largest impact bond-issuing country in the world. During this period, the country saw a 48% increase in issuance over 2021.
Concurrently, FTSE Russell highlights that China holds a substantial 41% share of the total impact bond issuance in the APAC region, establishing dominance in the issuance of both green bonds and carbon neutrality bonds. South Korea follows closely behind with a 19% share.
“China is leading the way in terms of green bonds, but we are also seeing more interest in social bonds in the Asia region,” said Bernard Hsu, Director of Business Development – Reference Data and ESG for APAC at ICE.
Presently, impact bonds enjoy significant involvement from institutional investors. However, analysts believe there is a strong potential for issuance to retail investors as well. In February 2022, Hong Kong experienced an exceptionally enthusiastic reception for its inaugural green retail bond offering, attracting approximately 493,000 purchasers. Now, the Hong Kong government has announced the second round of retail green bond issuance on September 18.
Limitations of impact bonds
Impact bonds come with a set of limitations. Investors who purchase these bonds must contend with a substantial degree of financial risk, and there is a noticeable absence of a comprehensive regulatory framework.
Investors stand to benefit if the issuer achieves the predetermined objectives; however, in cases where the issuer falls short of these goals, investors face the risk of losing their investment. Furthermore, there is no mechanism available for investors to monitor the performance of the bond issuers.
Analysts opine that the ESG ratings that the investors rely on do not present the actual picture of whether the issuer is making a genuine impact. The pay-for-success model that the impact bonds follow has also met with some criticism.
Outlook for impact bonds
Currently, green bonds enjoy higher demand than social or sustainability bonds. However, market watchers believe that sustainability-linked bonds are an emerging area of interest.
Analysts are upbeat about a further rise in APAC impact bonds in the near future. “APAC impact bond market performance had shown better resilience compared to its global peers during the fixed income downtrend last year,” says Ian Chen, FTSE Fixed Income and Multi-Asset Index Product Associate.
“As most central banks are toward the end of interest rate hikes, we expect market conditions to stabilise and issuance level of APAC region to slowly improve in coming months,” he adds.
Experts also predict a more mature and better organised market for APAC impact bonds. Thus, investors could hope for a more holistic approach in the future and assess an issuer’s performance based on specific metrics.
