Asia’s varying economic and energy dependence on fossil fuels hampers setting realistic targets for carbon neutrality and decarbonization strategies.
- While China, India and the Republic of Korea dominate the issuance of climate-related financial instruments, the majority of countries do not issue climate bonds at all
- More assertive political action in favor of renewable energy development projects, such as solar photovoltaic, wind and hydroelectricity in government plans is necessary to facilitate the energy transition and improve financing solutions for decarbonization.
According to a new study launched by Janus Henderson Investors, the issuance of climate-related financial instruments in Asia is dominated by China, India and the Republic of Korea, knowing that most countries do not use climate finance at all. issuance of climate bonds. The report entitled “Decarbonisation in Emerging Markets – Perspectives and Insights from Asia” analyzes decarbonisation initiatives in emerging countries according to three indicators: the share of renewable energies in the total energy mix, the percentage represented by climate bonds in total bond issuance, and target dates for achieving carbon neutrality. This new report builds on its predecessor, published in February 2022, which revealed that the relative lack of political ambition and absence of private sector financing was holding back the acceleration of decarbonization progress in Latin America.
Decarbonizing Asia is key to limiting global temperature rise
With China and India being two of the world’s biggest carbon emitters, decarbonizing Asia is crucial to keeping global temperature rise below 2°C. Yet in 2020, the regional decarbonization rate was only 0.9%, well below the global average of 2.5%. This slow evolution is explained by several obstacles, including dependence on fossil fuels, limited access to green financing solutions, varying degrees of state control of the market, as well as poor frameworks and practices that weighs on emissions targets and the collection of emissions data. While nearly three-quarters of Asian emerging markets have set or announced net-zero emissions targets, the deadlines range from 2030 (Maldives) to 2070 (India).
However, government commitment to renewable energy generation has grown across the region, showing that countries of all sizes understand the role they have to play. At first glance, countries with fewer populations consume more renewable energy; however, when placed in the context of population, China’s and India’s relative consumption of renewable energy increases dramatically. Renewable energy consumption in the region is driven by hydropower, largely due to historic investments; however, more recently, wind and solar generation have begun to come to the fore.
In 2021, thanks to a small number of countries, the Asia-Pacific region was the region with the strongest growth in green bond sales globally. In total, the region sold $124.53 billion worth of green debt in 2021, an increase of 128%.
China is seizing the opportunities of the green transition
As Asia’s economic powerhouse and biggest carbon emitter, China is fueling the regional shift towards renewable energy, backed by government policy keen to spark an energy revolution. China already produces a significant share of the world’s renewable electricity; its wind installations reached a peak of 72.5 GW in 2020, almost triple the production of 2019, and solar energy increased by 60%. China’s national policy aims to raise the share of non-fossil fuels to 80% of its total energy mix by 2060, with a combined solar and wind capacity of 1,200 GW by 2030.
China has also developed its own standards for allocating and reporting the use of green bond proceeds; currently, issuers can use up to 50% of the proceeds of these instruments for “general” purposes. This is a positive step, but goes once morest international guidelines that state 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 it significantly reduces the attractiveness for international investors.
However, China has the necessary headroom to become a leading sovereign issuer. This development would send a strong signal regarding China’s leadership in green finance globally, opening the country to more foreign investment and likely encouraging other emerging markets in the region to follow suit. However, China’s limited capital account liberalization, as well as the dominant state presence in some industries, might delay this eventuality.
Other key players in Asia: India and the Republic of Korea
Despite the vast need for green solutions and investments, India’s commitment to green finance remained limited until last year: the country issued $6.8 billion worth of green bonds , which represents the largest issuance since its first issuance in 2015.1 This rapid increase in bond issuance was partly driven by the issuance of sovereign green bonds integrated into the government’s official borrowing programme. The Reserve Bank of India is also due to release its framework for sovereign green bonds later this year along with a series of financial incentives. This might be the start of a new phase of green projects that will hopefully 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 commitment to net-zero emissions by 2050 is fueling the sale of green debt. Like China’s “Catalogue of Approved Green Bond Projects”, Korea has developed its own green bond framework and taxonomy to eliminate greenwashing, while taking significant steps to align them on EU taxonomy. The development of clear emissions guidelines complements the government’s call for proposals for the possible sale of offshore green bonds aimed at increasing foreign investment.
Janus Henderson says more investment is needed in hydrogen and more efforts to reduce carbon emissions
Emerging markets in Asia will need to continue to balance economic growth with the accessibility and availability of affordable and available renewable energy. It is clear that bond investors have an opportunity to play a key role in helping companies grow their capital to meet long-term issuance targets and international commitments. Hydrogen is predicted to be one of the fastest growing alternative energy sources over the next decade; investing in hydrogen solutions as a low-carbon alternative might accelerate the transition to clean energy in the region. It will also be necessary to build more robust networks to efficiently distribute these alternative energies. As the energy transition continues to unfold in the region, it is likely that we will see governments implementing carbon regulatory programs that will put pressure on private companies to reduce their emissions. Therefore, the demand for a sharper carbon credit market is also likely to increase so that companies can buy credits to offset their emissions.
Matt Doody, Emerging Markets Equity Research Analyst at Janus Henderson, said: “As the factory of the world, Asia uses significantly more energy in its economy than other regions, often fueled by coal or diesel. However, most emerging markets in Asia are underutilizing climate finance solutions, and those issuing green bonds are the dominant economic powers in the region. Reducing greenhouse gas emissions and transitioning to clean energy in these markets requires significant investment in generation capacity, which can guide efforts to change the energy mix, as well as policy regulation coordinate. As we observed in our last report, the main challenge facing emerging markets is the ability to create regional frameworks or green financing tools that are immune to government blockages in different countries. We believe that a more open and realistic dialogue is needed to create solutions that are both flexible enough to react to the reality of local problems and tough enough to hold the region accountable for driving long-term change.”
Ales Koutny, portfolio manager at Janus Henderson, said: “Asia offers a clear decarbonization opportunity, as some of the countries within it face some of the biggest carbon emissions challenges. While Asia was represented at the start of green bond issuance, it now lags far behind other regions such as Europe or North America. As investor appetite for green bonds continues to grow and we begin to discern new climate finance initiatives, such as Singapore’s Green Bond Issuance Framework, Asia may outpace the rest of the world. In fact, with the combination of supportive government policy, technological innovation and emerging financing solutions, the region might very well find itself at the forefront of the next (green) industrial revolution.”
