In Asia, recent decarbonization trends are encouraging

While the fragmentation of the Asian market is hurting decarbonization initiatives in the region, recent trends are encouraging.

Things to remember:

  • While China, India and the Republic of Korea dominate the issuance of climate-related financial instruments, most countries do not issue climate bonds at all.
  • Asia’s varying economic and energy dependence on fossil fuels hinders the setting of realistic targets for carbon neutrality and decarbonization strategies.
  • More assertive policy action in favor of renewable energy development projects such as solar photovoltaic, wind and hydropower in the government’s plans is needed to ease the energy transition and improve financial solutions for decarbonization.

Climate finance issuance in Asia is dominated by China, India and the Republic of Korea, knowing that most countries do not use climate finance to issue climate bonds at all, according to a new study launched by Janus Henderson Investors. The report titled “Decarbonization in Emerging Markets – Perspectives and Perspectives from Asia» analyzes decarbonization initiatives in emerging economies along three dimensions: the share of renewables in the total energy mix, the share of climate bonds in total bond issuance, and target dates for achieving carbon neutrality. This new report builds on a previous report published in February 2022, which showed that a relative lack of political ambition and a lack of private sector funding are holding back the acceleration of decarbonization in Latin America.

Asia’s decarbonization is key to limiting global temperature rise

As China and India are the world’s two largest carbon emitters, decarbonizing Asia is critical to keeping global temperatures below 2°C. However, in 2020, the regional decarburization rate was only 0.9%, well below the global average of 2.5%. This slow evolution is attributed to several barriers, including reliance on fossil fuels, limited access to green finance solutions, varying degrees of government control over the market, and imperfect structures and practices that affect emission targets and emission data collection. While nearly three-quarters of Asian emerging markets have set or announced zero emissions targets, deadlines range from 2030 (Maldives) to 2070 (India).

However, there is a growing commitment by governments across the region to renewable energy production, showing that countries of all sizes understand the role they must play. At first glance, countries with smaller populations consume more renewable energy; however, in the context of population size, the relative consumption of renewable energy in China and India is rising sharply. Renewable energy consumption in the region is driven by hydropower, mainly due to historical investments; however, wind and solar generation have recently come to the fore.

In 2021, thanks to a small number of countries, the Asia-Pacific region became the region with the highest growth in green bond sales in the world. In total, the region sold $124.53 billion worth of green debt in 2021, up 128%.

China Seizes Green Transition Opportunities

As Asia’s economic powerhouse and largest carbon emitter, China is fueling a regional transition to renewable energy, supported by government policies seeking to spark an energy revolution. China already produces a significant share of the world’s renewable electricity; its wind farms peaked at 72.5 GW in 2020, nearly three times the rate in 2019, and its solar power has increased by 60%. China’s national policy aims to increase the share of non-fossil fuels to 80% in the total energy mix by 2060, and by 2030, the total solar and wind power capacity will be 1,200 GW.

China has also developed its own standards for the distribution and reporting of the use of green bond proceeds; issuers can currently use up to 50% of the proceeds from these instruments for “general” purposes. This is a positive step, but it is contrary to international principles, according to which public revenues should only be used to finance “green” projects. This difference is one of the main reasons for the imbalance between Chinese and foreign issuers and significantly reduces the attractiveness for international investors.

However, China has the necessary margin to become a leading sovereign issuer. The event will send a strong signal of China’s global leadership in green finance, open up the country to more foreign investment, and likely encourage other emerging markets in the region to follow suit. However, China’s limited capital account liberalization, as well as the state’s dominance in some sectors, may delay this event.

Other key players in Asia: India and the Republic of Korea.

Despite the huge need for green solutions and investment, India’s commitment to green finance remained limited until last year, with the country issuing $6.8 billion in green bonds, the largest issue since it was first issued in 2015 year. This rapid growth in bond issuance was partly spurred by the issuance of sovereign green bonds integrated into the government’s official borrowing program. The Reserve Bank of India is also due to publish its structure for sovereign green bonds later this year, along with a range of financial stimulus. This could be the start of a new phase of green projects that we hope will accelerate India’s decarbonization and energy transition.

The Republic of Korea’s energy sector remains dependent on fossil fuels and energy imports, but the country’s goal of zero emissions by 2050 is driving the sale of green debt. Similar to China’s “Catalogue of Approved Green Bond Projects”, Korea has developed its own structure and taxonomy of green bonds to avoid “green laundering” while taking significant steps to align them with the EU taxonomy. The development of clear emission guidelines complements the government’s call for proposals for the possible sale of offshore green bonds aimed at boosting foreign investment.

Janus Henderson says more investment in hydrogen and more carbon reduction efforts needed

Emerging markets in Asia will need to continue to balance economic growth with affordability and the availability of affordable and affordable renewable energy. It is clear that bond investors have the opportunity to play a key role in helping companies raise their capital to achieve long-term issuance targets and international obligations. Hydrogen is predicted to become one of the fastest growing alternative energy sources in the next decade; investing in hydrogen solutions as a low-carbon alternative could accelerate the clean energy transition in the region. It will also be necessary to build more reliable networks for the efficient distribution of these alternative energy sources. As the energy transition continues in the region, it is likely that governments will implement carbon management programs that will force private companies to reduce their emissions. Consequently, demand for a clearer market for carbon credits is also likely to increase so that companies can buy credits to offset their emissions.

Matt Doody, emerging market equity analyst at Janus Henderson, said: As the world’s factory, Asia uses significantly more energy in its economy than other regions, often running on coal or diesel. However, most emerging markets in Asia are underutilizing climate finance solutions, and green bond issuers are the dominant economic power in the region. Reducing greenhouse gas emissions and moving towards clean energy in these markets requires significant investments in generating capacity that can guide efforts to change the energy mix as well as coordinate regulatory policies. As we noted in our last report, the main challenge facing emerging markets is the ability to create regional structures or green finance vehicles that are immune to blockade by governments in different countries. We believe a more open and realistic dialogue is needed to develop solutions that are flexible enough to respond to the reality of local problems and tough enough to hold the region accountable for making long-term change.”

Ales Kutney, Janus Henderson portfolio manager, said: “Asia offers a clear opportunity for decarbonisation, as some of its countries face some of the biggest challenges with carbon emissions. While Asia was featured at the start of the green bond issuance, it is now well behind other regions such as Europe or North America. As investor interest in green bonds continues to grow and we begin to see new climate finance initiatives such as Singapore’s green bond issuance system, Asia could outpace the rest of the world. In fact, with a combination of supportive government policies, technological innovation and new financial solutions, the region may well be at the forefront of the next (green) industrial revolution.”