Analysis of Capacity Gap
The following elements are barring the successful green bond proliferation in the Asian market:
- Inadequate access to the external review of GBP compliance.
- Lack of clearly identified definition of GB that separates it from climate bond, and ESG bonds.
- Lack of government policies for incentivizing GB investment;
- Institutional and regulatory bottlenecks;
- Lack of aggregation mechanism;
- Lack of investor information and market intelligence;
- Lack of insurance mechanisms;
- Lack of clear risk profile of investment; and
- Unstable capital markets.
Performance and Pricing in the Asian Market
Although the basic principles are the same, the GB market operates and performs slightly different in Asia than those in Europe. If we compare GB performance with that of traditional market instruments for the Asian market, the following insights on performance and pricing can be derived:
- Some GB trading occurs inside non-green bonds. As the instrument is fairly new and many of the financial and non-financial institutions are yet to integrate the mechanism within the existing business portfolio, GB is traded within non-green bonds.
- GBs can outperform non-green. The bonds provide long-term sustainability and longer payment period over marginal interest rate or compound annual growth rate (CAGR). This provides ample opportunity for new investors and first-mover to harvest more benefits in the long term.
- However, for the same reason, GBs price tighter and appear less volatile than non-green bonds in stressed markets.
- However, GBs trade somewhat less than non-green bonds. This can be attributed to a lack of awareness among investors and authorities and regulatory and institutional bottlenecks.
Policy Recommendations
Promoting the Issuance of Green Bonds: As a new type of financial bonds, green bonds can be offered by financial institutions on the basis of applications and approvals, and with reference to the experience of financial bonds for SMEs. Early stage experiments and pilot programs can use the definitions and categories for green investment.
- It is recommended to identify the boundary of green bond issuers and encourage individualized design. It is important to determine the investment target and issuance duration of the green bonds. Considerations should also be given to the industry distribution and characteristics of the maturity structure of green credit issuance by various financial institutions, and, within the boundary set by the green credit statistical system, permitting financial institutions to submit specific plans for green bonds financing in light of such factors as their respective development status and industry focus.
Creating Incentives for Green Bonds Issuance: In order to safeguard the success of green bonds, the following policy incentives should be considered:
- Allow commercial banks to exclude loans backed by GBs from the calculation of its loan-deposit ratio (as long as they show that they keep an accurate account of risks, have sufficient capital, and run a successful green financing business).
- Allow financial institutions that meet the required capital to risk asset ratio and are capable of providing sufficient capital, to have access to 75% preferential risk weighting and preferential capital regulation requirement per the relevant provisions of the Administrative Measures on the Capital of Commercial Banks.
- Banks that invest in green bonds, should be permitted to apply a 50% multiplier for the portion of risk asset corresponding to the green bonds they hold when calculating their capital to risk asset ratio.
- Institutional investors that have subscribed to green bonds should be entitled to the same tax exemption policy as for treasury bonds. For corporate investors of green bonds, for instance, interest revenues received by investors from issuers should be fully exempted from corporate income tax.
- For enterprises that receive the capital raised through green bonds, encourage their local government to allocate a portion of its budget to provide discounted interest rates for part or all of the loans the enterprises have taken out.
Conclusion
It is true that the existing demographic shifts in world population, economy, technological and sociological parameters require drastic measurements in terms of achieving the increased energy demand and at the same time safeguarding the environment. Green financing especially green bond can be one of these solutions. Whether the ambitious climate and sustainability goals can be achieved, will depend significantly on the determination with which actors and states drive the development of green finance forward.
