Winter chill: China tops APAC ESG market, but deal flow cooling as year-end approaches

Data InsightDebtDynamics 15 November

Winter chill: China tops APAC ESG market, but deal flow cooling as year-end approaches

The environmental, social and governance (ESG) debt market in Asia-Pacific has started to slow after peaking in 1Q22 at USD 65bn. Declines seen in 2Q22 and 3Q22 are likely to continue to the year-end, and spill over to the start of 2023. Green instruments have seen the largest fall, withering to USD 30bn in 3Q22 from USD 45bn in 1Q22. In comparison, social debt has surprised the market, with a slight uptick in 2Q22.

Talking point: China’s ESG dominance is falling short in social component

Over the past five years (since the start of 2018), China has dominated the ESG market, with a 45% share of total debt issued. While 69% of deals have been priced in accordance with green regulations, in conjunction with an increased flow of sustainable deals, the Middle Kingdom has fallen short on ramping up the social component of its ESG activity. Various green initiatives introduced in the country have provided a robust platform for environmentally-friendly deals; however, it is Japan and South Korea leading Asian social lending, with market shares since 2018 of 49% and 38%, respectively.

China, the largest player in the APAC region, has been struggling to hold creeping inflation at bay. While government lockdowns, in adherence with a strict zero-COVID-19 policy, have manifest in supply-chain disruption affecting other countries around the world, they have helped to curb rising food prices.

China’s green issuance volumes have notably correlated with crude oil prices over the past five years. The more expensive the cost of oil, the greater the pressure to develop sustainable energy at home. Moreover, lower energy prices enable the country to focus on more pressing economic challenges, such as rising inflation, waning consumer purchasing power and an aging population.

Despite market expectations that Russia’s war in Ukraine would dampen China’s economy further, the country has benefitted from lower energy prices on Russian fossil fuels. Although there has been a significant discount on Urals crude oil since President Vladimir Putin launched his invasion of Ukraine, a price cap on Russian oil has yet to be introduced.

Bleak mid-winter for green investing, but social has potential to grow

We expect the onset of colder months and the shortage of energy sources in Europe to push up oil prices over winter, while Trading Economics expect Urals to reach around USD 80 per barrel by the end of the year. The lack of deals coming through in October, coupled with expected higher flow of Russian oil to the APAC region, suggests the next surge in ESG activity is unlikely to come in the next three to five months. However, we anticipate a window of opportunity if China develops a framework for social governance-related debt.

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