ESG and the Eurobond Market
ESG and the Eurobond Market
May 7, 2021
The Eurobond market (i.e., the international bond market issued through ICSDs Clearstream and Euroclear) for Asian issuers has gone from strength to strength in recent years. As the market has evolved, a clear theme is emerging: environmental, social, and governance (ESG) considerations play a vital part in this growth.
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As noted in a recent BNY Mellon paper, A Fresh Opportunity in a Crowded Market: What APAC Issuers Should Know About Eurobonds, the growth of Eurobonds is a story of broadening horizons. Investors are looking for ways to get broader exposure to the diverse growth opportunities in Asia's many local markets. In parallel, issuers are looking for ways to find broader liquidity sources via international investors and the immense flexibility of the Eurobond market across types of debt, size of transactions, length of tenor, and multiple jurisdictions and currencies.
In a webinar discussing Eurobond issuance in Asian markets in further depth (moderated by Richard Schwartz of Global Custodian), BNY Mellon's Kenneth Cheong, Head of APAC for Corporate Trust, and Rosa Scappatura, Head of Corporate Trust Luxembourg and ICSDs Relationships, explored current trends with:
Issuers use Eurobonds to achieve strategic objectives beyond liquidity, such as raising their international profile for potential future expansion or M&A scenarios, Scappatura noted. They become better known in the international investment community by participating in the Eurobond market. As Kuhnel observed, such participation often complements issuers’ transactions in their local bond markets. Local markets today are intrinsically linked with global markets, he added. Succeeding locally drives success globally, in other words.
The strong demand for sustainability among international investors (especially from European investors, where ESG themes play a greater and greater role) may also add further impetus to Asia's transition to ESG priorities, Delestienne observed.
Citing data from Bloomberg, Delestienne added that total green, social & sustainability bond issuances alone exceeded EUR 530 billion in 2020. On the Luxembourg Green Exchange, 2020 saw a 50% increase in the number of sustainable issuances and a 130% increase in the total value of issuances.
ESG debt issuance is also evolving and maturing within the Eurobond market. Mueller described this segment of the market as merely at the beginning of its journey. New structures are increasing in significance. Sustainability-linked bonds commit issuers to ESG outcomes beyond the specific use of proceeds. Transition bonds specifically raise capital to help companies with high carbon footprints evolve rather than excluding them from investment by international investors.
The social component of ESG has also drawn new focus among some issuers in Asia. Cheong pointed out that COVID-19 has acted as an accelerant to this trend. Sovereign issuers such as Indonesia found innovative ways to address the impact of the pandemic via debt capital markets while at the same time supporting broader positive social outcomes, including healthcare, the social safety net, and small and medium enterprises.
As international ESG demand and Asian issuance continue to grow in concert, ESG investment will likely continue to evolve, including the development of more robust shared standards and taxonomies to cover ESG criteria and a wider consensus on the data needed to track sustainability in debt capital markets. Such efforts will include input across the market from issuers and investors to industry bodies, governmental entities, and service providers up and down the transaction chain. The resulting increase in transparency will further drive maturity in ESG issuance on the Eurobond market.
In general, ESG represents a strong match between investor goals to deploy their capital towards sustainability and issuer goals to fund a more sustainable Asia. While the Eurobond market helps increase breadth of access for both Asian issuers and investors, ESG adds an additional level of harmonisation of interests among parties in the market. We expect it to remain integral to the broader Eurobond growth picture in the coming years.
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