ASEAN Sustainability-Linked Bond Standards to Boost Corporate Issuances

New Sustainability-Linked Bond standards for Southeast Asia will help catalyse greater corporate participation in green finance and mitigate greenwashing across the ASEAN region. This article examines the drivers behind the new standards and outlines what treasurers need to know going forward.

As sustainable finance has continued to grow in importance and relevance, the Association of Southeast Asian Nations (ASEAN) launched the ASEAN Sustainability-Linked Bond (SLB) Standards at the end of 2022. This followed the launch of the ASEAN Green Bond Standards in 2017 and the ASEAN Social Bond Standards in 2018.

In Sustainable Fitch’s view, the release of the ASEAN SLB Standards will help to increase the range of sustainable investment offerings and mitigate greenwashing risks in the region, which will eventually accelerate sustainable development.

The ASEAN Capital Markets Forum (ACMF), which comprises 10 Southeast Asian countries, published the standards for SLBs in October 2022 to facilitate the instrument’s role in the region’s sustainable transformation. The aim of this set of standards is to enhance transparency, consistency, and uniformity across ASEAN SLBs.

The ASEAN standards take their cue from the International Capital Market Association’s (ICMA’s) Sustainability-Linked Bond Principles, which are internationally accepted, widely adopted, and can be calibrated to the specific needs of a region. These will give investors more assurance that instruments labelled as ‘ASEAN sustainability-linked bonds’ have met qualifying criteria, which can reduce the risk of greenwashing. In addition, the standards will equip regional issuers with specific guidance on best practices to ensure that bonds that come to market are of good quality with material sustainability performance targets.

Catalyst for greater ESG activity

The new standards add to the existing suite of standards collectively launched by ASEAN member states in recent years. They will help serve as a basis for the development of sustainable financing and better facilitate investment and fundraising activity across the region. It is likely that the publication of SLB standards will help spur more activity in the green, social, sustainability and sustainability-linked bond market in Southeast Asia. This is particularly so given that corporations face increasing pressure to secure funds to future-proof their operations, decarbonise, and safeguard against climate risks.

To reach net-zero goals by 2050, many countries and companies operating in a multitude of sectors will have to undergo significant transformations, which will require sizeable funding to achieve. SLBs can be issued by entities or for specific projects that are not typically classified as ‘green’, which will enable more corporates to raise critical financing through the sustainable debt market. This will be useful for the many Southeast Asian countries that are still in the early stages of their sustainability and transition journeys, as well as the many companies that still operate in carbon-intensive or brown sectors.

Sustainable Fitch expects more SLB issuances from industries such as power generation, energy, and transport in the coming months. ACMF said that a total of US$29.82bn in bonds have been issued under the ASEAN Green, Social and Sustainability Bond Standards as of 21 October 2022. This figure is likely to rise further.

It is likely that the publication of SLB standards will help spur more activity in the green, social, sustainability and sustainability-linked bond market in Southeast Asia.

Overcoming ESG fragmentation

Investors must acknowledge that Asia is a highly fragmented region with countries at various stages of economic development and of varied levels of sophistication when it comes to development of ESG policies and implementation. Bearing this in mind, we note that the interoperability of ESG regulations across jurisdictions has become an increasingly prominent issue. In our view, having more common sets of standards will promote greater integration and connectivity across regional capital markets, somewhat mirroring the European Union’s style of co-ordination and implementation. Having these standards as reference might also prove beneficial in reducing due diligence costs for corporates and investors and will ultimately help investors to be more informed about regional SLB issuances.

The ACMF also launched the ASEAN Sustainable and Responsible Fund Standards (SFRS), which are targeted at collective investment schemes. These standards are meant to provide the minimum disclosure and reporting requirements for the rising number of schemes and funds with an ESG focus. This too will mitigate greenwashing risks because such funds must demonstrate compliance to meet the SRFS. The release of both sets of standards will hasten the region’s progress towards achieving the 2030 Agenda for Sustainable Development.