Green Bonds: Financing Renewable Energy in Asia

A wind power project in Turpan, PRC.
A wind power project in Turpan, PRC.

By Thiam Hee Ng

Asia’s share of world energy consumption is rapidly growing, and meeting this demand in a sustainable way requires a shift in investment away from fossil fuels toward renewable energy sources.

Energy needs in Asia are huge. If the region continues its high rate of growth, Asia’s share of world energy consumption could rise from around a third in 2010 to more than half by 2035. Raw energy consumption in the region will more than double. Meeting these needs in a sustainable way will require a shift in investment away from fossil fuels towards renewable energy sources.

Despite the growing consensus on the need for renewables, both governments and investors continue to question the affordability and profitability of large-scale investments. Significant upfront costs and long payback periods of renewable energy projects have often discouraged investors from financing these projects. And with government finances already overstretched in many countries, the public sector will find it hard to meet the large financing needs of renewable energy.

Improving the financing mechanisms for renewable energy projects is essential to lower the financing cost and make the transition towards renewable energy more affordable – for investors, governments, and consumers. The large pool of investable funds available in Asia suggests that the private sector can play a major role in providing financing.

While banks have been the traditional route to finance renewable energy projects, new Basel III regulations could make banks more reluctant to lend long-term.

This suggests that bond markets can play an important role in financing renewable energy projects, just like for infrastructure projects. With heightened interest in investing in renewable energy, there is a large pool of potential investors. But to attract these investors, however, the investment will have to be packaged in a form that they are familiar and comfortable with, which has traditionally been bonds.

Companies in the renewable energy sector have increasingly tapped bond markets. The June 2015 Asia Bond Monitor estimated that since 2010, total bonds issued by renewable energy corporations globally have increased from $5.2 billion to $18.3 billion. Asia has been leading the way in issuing bonds, with the bulk of it coming from the People’s Republic of China.

Renewable energy sector bond issuance by region in Asia. Source: Bloomberg LP

The growing popularity of "green bonds"—bonds where the issuer has committed to use the proceeds for projects with environmental benefits—can provide a further boost to renewable energy financing.

In 2014, total issuance of global green bonds reached $30.5 billion, more than double the amount in 2013.  Since they were introduced, most green bonds issuances have originated from international organizations like multilateral development banks, development, banks and export credit agencies. ADB recently raised $500 million from its inaugural green bond issue, aimed at channeling more investor funds to ADB projects that promote low-carbon and climate-resilient economic growth and development in developing Asia.

The rise in green bonds has been supported by growing interest in investing according to environmental, social and governance criteria. The Global Sustainable Investment Alliance found that assets invested based on sustainable principles have grown from $13.3 trillion to $21.4 trillion between 2012 and 2014. As a proportion of professionally managed assets, the share of sustainable related investment has risen to 30.2% in 2014 from 21.5% in 2012.

However, while the share of assets managed according to sustainable criteria have increased in all regions, it is important to highlight the share in Asia is very low at only 0.8%, way below the global average and far behind the almost 60% share in Europe. This could explain why in Asia green bonds have been slower to take off, and why so far there have been only two Asian corporate green bond issuances.

Governments also need to ensure there is a stable, long-term regulatory framework as renewable energy projects have long payback period. While the cost of renewable energy has fallen, it still tends to cost more than fossil fuels. To help narrow the cost differentials, there may be a need to provide guarantee or set up dedicated funds to finance renewable projects. Greater investment in renewable energy could lead to economies of scale and greater familiarity among investors, diminishing the need for guarantees or special funding.To facilitate further use of green bonds in financing renewable energy, we must develop broad and deep capital markets.

Narrowing the information gap can also help reduce the perceived risk of renewable energy investments.

Before investing in infrastructure projects, investors typically would like to examine the track record of similar projects. Without historical data on past financial performance, investors may be reluctant because they lack the information to make the necessary estimate of future returns. Making historical data publicly available would improve transparency in the investment process. Governments can also provide more information about the availability of renewable energy from their assessment and mapping of renewable energy resources.