Hong Kong and China interest in AI and regtech ‘palpable’ despite soft fintech funding: report | FinanceAsia

Fintech companies in Asia Pacific received $5.1 billion of funding in the first half of 2023, a further drop from $6.7 billion during the same period last year, a recent KPMG report has revealed.

The figure points to a “very soft” fintech funding landscape in the region, in contrast with $36.1 billion of funding in the Americas, and $11.2 billion in Europe, Middle East and Africa (EMEA), the study showed.

In terms of number of fintech funding deals, 432 were completed in the Apac region, compared with 1,011 in the Americas, and 702 in EMEA.

“The global fintech market has seen challenges, with a decline in both funding and deals,” Barnaby Robson, deal advisory partner at KPMG China told FinanceAsia.

“Public companies have changed materially, with entire industries trading at fractions of previous valuations. But founder expectations have not moved as fast, meaning private valuations are adjusting slowly as companies seek new funding,” he explained.

The report, Pulse of Fintech H1’23, aggregated data from global venture capital (VC), private equity (PE) and mergers and acquisitions (M&A) deals in 2023’s first half, and looked into various segments including payments, insurtech, regtech, cyber security, wealthtech and blockchain.

The largest fintech deal H1 2023 in the region was $1.5 billion raised by Chongqing Ant Consumer Finance, the consumer finance unit of China’s Ant Group, which faced Beijing’s pressure to restructure in compliance with regulatory limits.

“Fintech funding in China is very dry” outside of Chongqing Ant Consumer Finance’s deal, the report noted. Businesses and investors in China tend to prioritise post-pandemic recovery, waiting for outcomes from prior investments, it explained.

Other significant deals in Asia include $304 million raised by India-based Vistaar Finance, and $270 million raised by Kredivo Holdings in Singapore.

Rebound potential

Despite slowing deal activity and slashed valuation, the intrinsic value and potential of the fintech sector in Hong Kong, mainland China, and Asia in general, remained robust, Robson told FA.

Fintech firms in the area are increasingly looking at leveraging artificial intelligence-generated content (AIGC), the report identified.

“In mainland China, the focus on AI in insurtech, creditech and wealthtech is evident. Hong Kong, with its global connectivity, needs to navigate the growing challenges of dealing two different AI regimes and mainland China data onshoring rules. The diverse financial landscape and low productivity in emerging Asia, offers a fertile ground for AI-driven fintech innovations,” Robson detailed.

“AI’s potential to revolutionise fintech segments is undeniable.”

Despite the US and Europe being leaders in regtech, or regulatory technology, interest from Hong Kong and China is palpable, according to Robson.

“With the People’s Bank of China’s (PBOC) recent announcements and Hong Kong’s agile regulatory framework, it’s clear that the region is gearing up for a more transparent and efficient financial ecosystem,” he said.

China’s central bank released a set of draft administrative measures on data security management last month for public consultation, signalling the watchdog’s enhanced emphasis on data processing securities amid geopolitical tensions.

Many financial institutions are embracing regtech to improve the efficiency and effectiveness of addressing compliance and regulatory requirements, Robson noted.

In his view, the confluence of AI advancements, regulatory shifts, and a growing middle class could very likely help catalyse fintech funding in Hong Kong, mainland China as well as the broader Asia region.

But that would be possible only after “a more complete reset in multiples to get to where valuations reflect fundamentals, and market clearing prices exist”.

He pointed to late 2024 or 2025 as a likely timing for such a rebound, citing fintech being properly valued on a realistic discounted cash flow (DCF) or free cash flow (FCF) basis as a contributing element.

“It’s a matter of when, not if,”

¬ Haymarket Media Limited. All rights reserved.

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Krayon Digital and Sayfer partner to enhance Web3 security | FinanceAsia

Krayon Digital, a digital multi-party computation (MPC) wallet solutions provider to start-up and enterprise clients, recently announced its strategic partnership with Israeli blockchain security consulting company, Sayfer.

“The partnership between Krayon and Sayfer is the result of a shared ambition – to revolutionise the security landscape within digital asset management,” Hamilton Keats, CEO and co-founder of Krayon told FinanceAsia.

Typically, a cryptocurrency or digital asset wallet is paired with a single private key that authorises transactions. However, this means that if the private key is stolen or lost, it creates a single point of failure where all digital assets secured by the key are exposed to risk.

Krayon, on the other hand, provides digital wallet solutions based on MPC technology: a cryptographic protocol that enables multiple parties to contribute to a database and run computations on its basis in a secure manner, without disclosing their own input to others.

The implementation of MPC technology involves splitting private keys into pieces, or shards, that can be distributed among multiple trusted parties, such as different departments within an organisation or even different geographical locations, Keats explained.

Such deployment avoids a single party having full access to a whole private key, which greatly reduces the risk of unauthorised crypto asset access or theft.

The partnership with Sayfer will enable the development and implementation of “a comprehensive suite of [security] measures”, including end-to-end encryption, secure key generation, storage and recovery mechanisms, multi-factor authentication, and continuous security audits.

The collaboration roots from an initial all-round assessment on Krayon’s protocols, where both parties saw a lack of attention to private key management in the field, Keats told FA.

“We’ve seen so many people dealing with tens of millions of dollars [in digital wallets], but with no private key management or private key security involved,” he said.

“Our joint efforts will bring together Sayfer’s expertise in key management audits and Krayon’s cutting-edge MPC technology to deliver a secure and seamless experience for our clients,” Nir Duan, Sayfer’s CEO, commented in the release.

Blockchain and beyond

Discussing trends across the Web3 space, Keats pointed to asset tokenisation as the most exciting use of blockchain technology across Asia’s capital markets. “This revolutionary process will completely streamline global financial markets and enhance transparency.”

Although issues around security, regulatory compliance, and private key management remain some of the main challenges for the success of Web3, Keats is bullish on regulatory progress across the region.

He noted that key hubs, including Singapore and Hong Kong, are building friendly innovation framework to create regional sandboxes, and some financial institutions are seeking to tokenise their assets. These, Keats said, send promising signals of “a massive opportunity” for players building the digital asset space.

Looking ahead, Krayon aims to make MPC a more accessible and flexible solution available across the digital asset management world. The key to this lies in improving usability, which includes simplifying the complicated wallet set-up process, and offering flexibility in distribution adjustments, Keats told FA.

Embedding MPC wallet solutions into broader digital asset capabilities, such as a consumer-facing app built upon the same software development kit (SDK), is a long-term goal for the partnership.

As enterprises usually manage larger amount of asset than individual users, the ability to recover the losses, or to prevent insecurity in the first place, is crucial, Keats reiterated.

“Our ultimate goal is to offer individual clients the same level of services as we are able to offer start-ups and enterprises,” he concluded.

¬ Haymarket Media Limited. All rights reserved.

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Return of the ‘Big State’ will be short-lived

Economists usually find plenty of ways to disagree about the true meaning of government economic policies.

The big innovation of the past 10-15 years was monetary, with the Bank of Japan at the forefront of what became a worldwide practice of money-creation and the mass-purchase of government securities by central banks.

Economists debated the ultimate purpose of this policy trend – was it anti-deflation, or aimed at rescuing banks and securities markets, or financing public investment? – but the trend itself was indisputable.

Now the big trend is industrial policy, with vast programs of public subsidies and investment, but strangely there is much less debate about it. President Joe Biden has led the way in the United States, which is why some call it “Bidenomics.”

Although the European Union actually got there first with its “Next Generation EU” fund that was set up during the Covid pandemic, America sees its program as bigger, better and more headline-grabbing – which is why the tempting slogan of “Bidenomics” has taken hold, following the earlier examples of Reaganomics and Abenomics.

What economists seem to agree on is that these big programs mean that what they call the Big State is back. This is epitomized in the United States by the Chips and Science Act, devoting US$52.7 billion to supporting the semiconductor industry, and the Inflation Reduction Act, under which more than $400 billion is being spent over the next 10 years on the energy transition and on infrastructure.

Joe Biden wants more things made in America. Image: Twitter

By “the Big State” is meant large-scale state intervention in industry – which also means favoring national producers at the expense of imported goods and services, which makes this policy trend also protectionist.

That protectionist aspect contributes to a widespread feeling that the era of globalization might be over. With America and the EU leading the way with big-spending industrial and infrastructure policies, it is assumed that other countries such as Japan and the United Kingdom will have to try to compete so as to stop their own firms and own production moving to where the biggest subsidies are on offer.

Thanks to that theory of competition between nations, the consensus among economists seems to be that this trend of big-spending industrial policies is here to stay – that, just as the big monetary policy trend lasted more than a decade, so will this one.

In support of that argument are two other factors: first, the fact that the battle against climate change and for the green energy transition is a long-term one, which will require public subsidies and investment if it is to succeed; and second, that the technological and military contest between the US and China is also a long-term reality that will perpetuate big-spending industrial policies designed to prevent Chinese dominance, whether military or economic.

To me, however, the idea of this as a long-term trend is both compelling and lacking in credibility. It is compelling because it is true that geopolitical competition and tensions, and the urgency of dealing with climate change, feel fundamental to our era.

But it is lacking in credibility for a simpler reason: Public subsidies and investment need somehow to be financed, and financing these ambitious industrial policies will be very difficult at a time of high levels of sovereign debt and rising interest rates.

The paradox of the previous, monetary-policy-dominated era was that when borrowing was ultra-cheap, few governments felt able to exploit it to finance big programs of public investment. Now that borrowing costs are rising, governments are nonetheless trying to finance costly programs of public investment.

Doing so would be sustainable only if those programs were to succeed in raising the long-term rate of economic growth and thus in raising tax revenues. It would be wonderful if they did have that long-term growth-boosting effect. But it is more likely that any positive effect on growth will be quite short-lived, as it is competing with the negative effects of rising borrowing costs.

Factory workers assemble and test fiber-optics systems in China. Photo: Wikimedia Commons/Ranveig

The era of big-state industrial policy feels to me as if it will actually prove quite short-lived, at least as a broad phenomenon. For example, political battles in the United States about the official ceiling on federal public debt make it hard to envisage that the Inflation Reduction Act could ever be repeated.

The smaller, geopolitical element to this industrial policy trend might well persist, since both technological export-controls and so-called “de-risking” from dependence on China are driven by politics and not economics. The larger, climate-related portion will also persist in some form, but electorates are always reluctant to vote for tax rises to pay for it.

Overall, the wider popularity of industrial policy runs up against the realities of high public debt. Now that it has been noticed and, by some at least, celebrated, the phenomenon is probably already peaking.

Currently an independent writer, lecturer and consultant on international affairsBill Emmott from 1993 to 2o06 was editor-in-chief of The Economist. 

This article was originally published in Japanese by Nikkei Business and in English by his Substack publication, Bill Emmott’s Global View. (Subscribe here for free to receive his posts.) It is republished by Asia Times with kind permission. Follow the author on Twitter @bill_emmott

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A new era for DCM? | FinanceAsia

The repercussions of recent black swan events are contributing to a new dealmaking landscape – one that continues to ebb and flow as geopolitical tensions rise and governments work to ensure that regional emissions fall.

As regulators respond to global inflation with interest rate hikes, market participants are adapting to the post-pandemic outlook, where the structural integrity of systemic lenders has been called into question; bank runs have been navigated; and a debt ceiling default, narrowly avoided.

“Volatility is the only constant,” Elaine He, head of Debt Capital Markets (DCM) Syndicate for Asia Pacific at Morgan Stanley, told FinanceAsia.

“Bond issuance has been slow as issuers wait on the sidelines because of uncertainty and the increasing rates environment,” Barclays’ head of Debt Origination, Avinash Thakur, motioned. “The biggest factor impacting dealmaking continues to be the US Federal Reserve’s tightening bias.”

“Even if there is a lot of liquidity in the market, the cost of borrowing is too high,” Singapore-based corporate practice partner at DLA Piper, Philip Lee, told FA.

“Most CFOs, CEOs or other corporate decision makers who are in their late 30s or early 40s, would not have even started their careers when interest rates were this high – in the late 1990s, or early 2000s. I suspect it will take some time for companies to adjust to this higher interest rate environment.”

But Sarah Ng, director for DCM at ANZ, holds some positivity amid current market uncertainty. She noted how recent headline events are influencing short-term market sentiment and shaping deal-focussed behaviour, for the better.

“We are seeing narrower open market windows. This has meant that issuers have had to adopt an opportunistic and nimble approach when accessing primary markets,” she offered.

“We did see a degree of caution and a flight to quality, especially post-Silicon Valley Bank (SVB) and Credit Suisse, but the sell-off was largely contained to specific bank capital products. What has been surprising, has been the speed of bounce-back in both primary and secondary market activities, with a robust pipeline of issuers and receptive investor base back in play,” she explained.

FA editorial board member and head of DCM for Asia Pacific at BNP Paribas, Manoj Agarwal, agreed that unexpected developments have made market activity very much “window-driven”.

“From an issuer perspective, being prepared and able to access markets at short notice, as and when market windows are optimal, has become important,” he said. 

Furthermore, he noted that market recovery has been much faster this year, compared to the protracted period of indecision brought about by the Covid-19 pandemic.

“Although the year has been peppered with volatility and disruption, market efficiency is also improving, helping to reduce the impact these events have on dealmaking,” he emphasised.

Going local

George Thimont, head of ESG Syndicate for Asia Pacific and leader of the regional syndicate (ex-Japan) at Crédit Agricole, observes three notable trends emerging amid the current, Asia-based dealmaking environment.

“Issuance is broadly down across the board – in spite of good demand from the investor community. From a sectoral perspective, the notable absentees are the corporates, and local market conditions in certain jurisdictions, such as South Korea, have offered good depth and pricing versus G3 currencies.”

Citing Bloomberg data, Agarwal noted that for Asia ex-Japan, 2023 year-to-date (YTD) G3 DCM volume as of mid-June was down by 35.4% year-on-year (YoY), with 2022 already down by 54% compared to the same period in 2021.

But he agreed that South Korea displays some optimism, given that its 2023 YTD deal volumes remain flat, compared to the same period in 2022.

In fact, some of the market’s larger institutions have been quite active overseas. In February, the Korea Development Bank (KDB) issued $2 billion in bonds via Singapore’s exchange (SGX) in what constituted one of the largest public market issuances by a Korean institution in recent years.

Debt from issuers such as sovereigns, supranationals and agencies (SSA) or state-owned enterprises (SOEs) has benefitted, managing director and head of Asia Pacific Debt Syndicate at Citi, Rishi Jalan, told FA

“We expect corporate issuance in the US dollar bond market to be a bit more robust in the second half of the year,” he explained. In the meantime, Jalan said that some issuers are selectively tapping local currency markets where financing terms are lower, such as in India, China and parts of Southeast Asia.

However, not everyone feels that Asia’s regional markets can cater to the demands of the significant dry powder at play.

“Most liquidity in the local currency market comes from the banking system,” Saurabh Dinakar, head of Fixed Income Capital Markets and Equity Linked Solutions for Asia Pacific at Morgan Stanley, told FA.

He is sceptical of the current capacity for local markets to meet the requirements of internationally minded issuers. However, he noted as an exception the samurai market, which he said had proven vibrant for some corporates with Japan-based businesses or assets.

“Larger long-term funding requirements can only be satisfied through the main offshore currencies, such as dollar securities,” he explained.

Turning to the regional initiatives that have been set up to encourage participation in Asia’s domestic markets such as Hong Kong’s Connect schemes – the most recent of which, Swap Connect, launched in May – Dinakar shared, “What we need to see is broader stability.… These developments are great, but for investors to get involved in a meaningful way, general risk-off sentiment needs to reverse.”

“There was huge optimism around reopening, post Covid-19. This has since faded as corporate earnings have disappointed and there has been no meaningful stimulus. The markets want to see policy stimulus and, as a result, corporate health improving. Performance across credit and equities will then follow.”

Sustainable momentum

One area of Asian activity that stands strong in the global arena, is ESG-related issuance.

In March, the International Capital Market Association (ICMA) published the third edition of its report on Asia’s international bond markets. The research highlighted that, in 2022, green, social, sustainability and sustainability-linked (GSSS) bonds accounted for 23% of total issuance in Asia – higher than the global ratio of 12%.

“Demand is still more than supply, and investors tend to be more buy and hold, so we’ve seen that sustainable bond issuance has been more resilient than the market as a whole,” shared Mushtaq Kapasi, managing director and chief representative for ICMA in Asia.

“ESG has come to form an integral part of the dealmaking conversation in Asia. Over 30 new ESG funds have launched here in 2023; the number of ESG-dedicated funds is up 4% YoY; and Asia makes up 11% of the global ESG fund flow as of 1Q23 – up from 5% a year ago,” said Morgan Stanley’s He. 

“The Hong Kong Special Administrative Region (HKSAR) government recently came to market as the largest green bond issuer in Asia so far this year,” she added.

Discussing the close-to-$6 billion green bond issuance, Rocky Tung, FA editorial board member, director and head of Policy Research at the Financial Services Development Council (FSDC), shared that the competitive pricing contained a variety of durations and currencies that “help construct a more effective yield curve that will set the benchmark for other issuances – public and private – to come.”

This, he explained, would not only be conducive to the development of green and sustainable finance in the region, but would specifically enrich Hong Kong’s debt capital market.

“ESG-related bonds can provide issuers with an additional selling point to attract investors,” Mark Chan, partner at Clifford Chance, told FA.

“They can demonstrate the issuer’s commitment to fighting climate change for example…. Issuers with a social agenda, such as the likes of the Hong Kong Mortgage Corporation (HKMC), can highlight their mission and objectives by issuing social bonds to enhance the investment story.”

In October last year, HKMC achieved a world first through its inaugural issuance of a dual-tranche social facility comprising Hong Kong dollar and offshore renminbi tranches, which totalled $1.44 billion.

“We are also seeing more bespoke ESG bonds such as blue and orange structures,” Chan added, referring to recent deals that the firm had advised on, including the Impact Investment Exchange’s (IIX) $50 million bond offering under its Women’s Livelihood Bond (WLB) Series; and issuance by China Merchants Bank’s London branch, of a $400 million facility – the first blue floating-rate public note to be marketed globally.

FA editorial board member and head of sustainability for HSBC’s commercial banking franchise in Asia, Sunil Veetil, noted that while Asian issuance fell in most segments, green sukuk and social bonds helped sustain momentum.

“For green debt, energy was the most financed project category in Malaysia, the Philippines, Thailand, and Vietnam, accounting for more than 50% of allocation,” he shared, citing a report by the Climate Bonds Initiative (CBI).

“In Singapore, which remains the undisputed leader of sustainable finance in Southeast Asia, around 70% of green debt went to buildings, mainly for the construction of green buildings, and to a lesser extent, for retrofits and to improve energy efficiency.”

“There continues to be regulatory support for ESG bonds, including grants provided by the Asia-based stock exchanges to list green bonds,” added Jini Lee, partner, co-division head for finance, funds and restructuring (FFR) and regional leader at Ashurst. 

A boom for private credit

Crédit Agricole’s Thimont told FA that Asian credit has remained resilient through recent global risk events. Private markets and funds are emerging as alternative sources of capital for those corporates with weaker funding lines, DLA Piper’s Lee observed.

Indeed, the further retrenchment of banks from lending has provided an opportunity for private credit players to swoop in and fill an increasingly large void. Globally, the sector has grown to account for $1.4 trillion from $500 million in 2015 and Preqin estimates that it will reach $2.3 trillion by 2027.

Once a niche asset class, investors are drawn to private credit’s floating rate nature which moves with interest rates and offers portfolio diversification.

Andrew Tan, Asia Pacific CEO for US private credit player, Muzinich & Co, earlier told FA that private credit players aim for investment returns of around 6-8% above the benchmark rate in the current environment.

The firm’s sectoral peers, including KKR, have argued that institutional investors should consider allocating as much as 10% to private credit. Alongside Blackstone and Apollo, the US global investment firm has added to its Asian private credit capabilities in recent years, while new players, including Tokyo-headquartered Softbank, have recently entered the market. In May, media reported that the Japanese tech firm sought to launch a private credit fund targetting late-stage tech startups and low double-digit returns.

Elsewhere in Japan, Blackstone recently partnered with Daiwa Securities to launch a private credit fund in the retail space, targetting individual high net worth investors (HNWIs).

Unlike in the US, where non-bank lenders now outnumber traditional financiers, “Apac remains heavily banked, so we expect to see ample room for private debt to grow in the region,” Alex Vaulkhard, client portfolio manager within Barings’ Private Credit team told FA.

He sees particular opportunity to serve the private equity (PE) space. “Although PE activity has been a bit slower in 2023, we expect activity to return, which will increase lending opportunities for private debt.”

Asia accounts for roughly $90 billion or about 6.4% of the global private credit market, according to figures cited by the Monetary Authority of Singapore (MAS) that highlight the market’s growth potential.

The biggest vehicle in Asia to date is Hong Kong-headquartered PAG’s fourth pan-Asia fund which closed in December at $2.6 billion.

However, overcrowding in some markets – notably India, where investors have amassed since new insolvency and bankruptcy laws came into force from 2016 – has made lenders increasingly compete for deals and acquiesce to “covenant-lite” structures, where investor protection is reduced.

But Tan, who is currently fundraising for Muzinich’s debut Asia Pacific fund – a mid-market credit strategy with a $500 million target, believes this only to be a problem in more developed markets such as Australia and is unlikely to become an issue in the wider region.

“If anything, the trend is in the direction of more conservative structures with increased over-collateralisation and stricter covenant protection,” he told FA.

Fundamentally, seasoned private credit participants are aware of the importance of covenant protection, so their likelihood to compromise on this is low, he added.

With monetary policies tightening at one of the fastest rates in modern history and recession looming in several markets, a key challenge for private credit is borrowers’ ability to service their debts.

“There is no doubt that default rates will go up and I would be cautious of cashflow lends with little or no asset backing,” said Christian Brehm, CEO at Sydney-headquartered private debt manager, FC Capital, calling for adequate due diligence when evaluating opportunities in the current environment.

“We would not be surprised to see an increase in default rates, but these are more likely to occur in more cyclical industries or among borrowers who have taken on too much debt in recent years,” Vaulkhard opined.

The managers suggested a tougher fundraising environment ahead, as the performance of fixed income instruments improves to offer limited partners (LPs) attractive returns.

What’s next?

The banking sector’s evolving regulatory landscape is also contributing to Asia’s changing DCM outlook.

Initially proposed as consequence of the 2008 global financial crisis (GFC) and with renewed rigour on the back of recent adversity across the banking sector, new capital requirements are set to be rolled out in the US and Europe as a final phase of Basel III. Often dubbed “Basel IV” for their magnitude, market implementation was originally scheduled for January 2023, before being delayed by a year to support the operational capacity of banks and market supervisors in response to the Covid-19 pandemic.

Experts caution that while more stringent banking regulation will challenge Asia’s traditional lending mix, it will also offer opportunity.

“There is a big amount of regulatory capital to be rolled out following the new Basel III rules, which will impact the type of debt to be issued,” said Ashurst’s Lee.

“We have been speaking to issuers who have been anticipating this uptrend as well in the coming years and are building in this scenario in their mid- to long-term treasury planning,” she added.

“Although the implementation of the Basel III final reform package was postponed in jurisdictions such as Hong Kong, those subject to it will no doubt be grappling with the new capital requirements already,” said Clifford Chance’s Chan, noting how its introduction will likely impact banks’ risk-weighted asset (RWA) portfolios.

“Aspects such as the raising of the output floor could potentially see some banks try to charge more for their lending,” he said.

Hironobu Nakamura, FA editorial board member and chief investment officer at Mizuho and Dai-Ichi Life tie-up, Asset Management One Alternative Investments (AMOAI), agreed that the new Basel reforms will lead to more scrupulous risk assessment by lenders, but how this will affect banks’ portfolio construction more concretely, remains uncertain.

“A heavy return on risk asset (Rora) requirements will likely impact banks’ risk asset allocations, region to region. [But] it is quite early to determine whether Asia is risk-off or -on at this stage, from a bank portfolio perspective.”

FA editorial board member and AMTD Group chair, Calvin Choi, proposed that if lending were to become more expensive for global players, there could be upside for regional banks.

“Updated Basel rules will impact global banks operating onshore, adding costs and making them less able to use their balance sheets. Local banks won’t have this constraint, so they will win market share,” he shared.

However, he noted that  for those Asian banks that want to participate in overseas markets, business will become more costly and compliance-heavy. “It will keep more local banks local.”

“All of this will mean a higher cost of borrowing and less capital available to banks…. It will create opportunities for non-bank lenders such as non-banking financial institutions (NBFI), family offices and private funds to fill the gap,” said DLA Piper’s Lee.

“With stricter capital requirements under ‘Basel IV’, we anticipate that bank loan funding will become more expensive for issuers. As such, we could see a return to capital market funding from issuers who have hitherto heavily relied on loan markets this year,” said ANZ’s Ng.

Choi added that this may even lead to Asia’s bond markets being viewed as more competitive than their global counterparts.

“Overall, the DCM market has become slow and stagnated,” Nakamura observed. “However, there are areas where funding is continually needed,” he said, pointing to the energy transition space as well as digital transformation. 

What exactly the new regulatory environment will mean for Asia’s market participants amid macro volatility, rising interest rates and escalating geopolitical tensions, remains unclear. But the developing outlook could offer those able to structure more creative facilities, more business; drive the advancement of Asia’s local capital markets; and support the region’s wider efforts to transition to net zero.

Proponents of private credit remain optimistic.

“Capital raising might cool down in the short-term, but the true private debt lending market is about to kick off,” said Brehm.

“We believe that there is a lot of growth ahead,” Barings’ Vaulkhard stated, sharing that conditions are likely to improve for lenders this year, with spreads widening, leverage falling, and overall credit quality enhancing. 

“We are only at the start of a multi-year growth journey,” Tan concluded.  

 

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In-depth: Exploring Hong Kong and Indonesia’s strategic potential | FinanceAsia

Last week (July 26), Hong Kong Exchanges and Clearing Limited (HKEX) and the Indonesia Stock Exchange (IDX) signed a Memorandum of Understanding (MoU) marking strategic collaboration aimed at strengthening ties and exploring mutually beneficial opportunities across both markets.

According to the announcements, the partnership will see the exchanges meet regularly to develop new capital market products, including exchange-traded funds (ETFs) and derivatives; enable cross-border listings; and promote sustainable finance across the region, through shared best practices and the development of carbon markets.  

The releases point to the benefits made available through enhanced cooperation, including access to the international connectivity and vibrance on offer via Hong Kong’s marketplace, as well as the talent, creativity and innovative characteristics of Indonesia’s “new economy” participants.

Discussing the news, Singapore-based Clifford Chance partner, Gareth Deiner, who specialises within the firm’s South and Southeast Asian capital markets practice, shared with FinanceAsia his take on the opportunity presented by forging a deeper connection with the market that is home to world’s largest nickel supply.

“The mutually beneficial aspect of this collaboration is that it offers access to a wide pool of North Asian institutional investors and therewith, an enhanced liquidity pool.”

Shanghai and Singapore-based Clifford Chance partner, Jean Thio, acknowledged the significant number of Indonesian conglomerates that operate outside of the domestic market and seek access to North Asia’s investor community.

She highlighted her work in 2022, advising on the spin-off IPO of Chinese dairy farm operator AustAsia Group, a subsidiary of Indonesian agribusiness, Japfa, as demonstrating this point.

“International issuers look to Hong Kong as a way of accessing international institutional capital. The new collaboration complements other regional initiatives, such as Stock Connect.”

Hong Kong and China’s central banking authorities announced in May the launch of the sixth iteration of the regional bilateral scheme, the northbound channel of Swap Connect. The initiative is the first derivatives mutual market access programme globally and opens up institutional entry to China and Hong Kong’s interbank interest rate swap markets.

In terms of the current trends permeating Indonesia’s capital markets, Deiner shared, “Historically, Indonesia’s future-facing minerals – cobalt, copper and nickel – would be exported. But now these are proving key elements of Indonesia’s onshore energy transition story, as they are core components used in the manufacture of wind turbines, solar panels and electric vehicles (EVs).”

“As such, Indonesia has implemented bans on the export of unprocessed nickel ore, in order to facilitate the development of the EV supply chain onshore.”

Deiner and his team advised the underwriters of Harita Nickel’s IDR9.7 trillion IPO on the IDX in April, which media attributed to being part of a government push to privatise state-owned enterprises (SOEs).

Amit Singh, Singapore-based partner and head of Linklaters’ South and Southeast Asia capital markets practice agreed that the newly formed “super-connection” opens the door to meaningful, increased liquidity for Indonesian companies.

“Hong Kong also gains a valuable link with the growing mining and supply chain powerhouse that Indonesia is developing into,” he told FA.

“Mining, minerals and other supply chain-focussed industries are driving Indonesia’s IPO boom in 2023,” Singh explained, pointing to his involvement in Merdeka Battery’s IDR9.2 trillion ($620 million) IPO in April. The PT Merdeka Copper Gold Tbk subsidiary owns one of the largest nickel reserves globally and has a portfolio of EV battery assets across the Sulawesi region.  

“This trend is likely to continue and grow in the upcoming years, and Hong Kong is clearly seeking to position itself closely with Indonesia and its burgeoning strengths in these areas.”

Dual listings

Tjahjadi Bunjamin, Jakarta-based managing partner and head of the finance practice at Herbert Smith Freehills (HSF) partner firm, Hiswara Bunjamin & Tandjung (HBT), agreed that the MoU means that Indonesia will obtain greater access to Chinese issuers and the related international investment base.

“This is particularly important given the dominant role of Chinese companies in the EV ecosystem.”

He explained to FA that the collaboration further enables the exploration of dual listings by both parties: “Both will benefit from a more coordinated approach to listing in the two jurisdictions, as well as more clarity on listing requirements for issuers and investors.”

“Dual listings and increased regulatory cooperation will accelerate the maturation of the Indonesian capital markets, allowing them to more quickly adapt as deal sizes and investor interest and scrutiny in the market widens,” Singh added.

David Dawborn, HSF partner and senior international counsel at HBT, noted that a challenge for the partnership will involve the fact that Indonesia’s capital markets system remains primarily focussed on basic equity and debt securities.

“It could benefit from new ideas and products available through Hong Kong’s capital markets system, which is more flexible and easier to navigate in many aspects.”

In prior discussions with FA, experts have commended Indonesian regulators for their efforts to make the market’s domestic exchange more accessible and attractive as a listing destination.

In late 2021, the Indonesian financial services authority, Otoritas Jasa Keuangan (OJK), approved amendments to the listing regime to allow firms with multiple voting rites (MVR) to participate on the domestic exchange. The move signalled continued progress to bring Indonesia’s capital markets in line with other global exchanges, such as those of the US and Hong Kong, which have had dual class share frameworks in place since the 1980s.

Recent research by the Hong Kong Trade Development Council (HKTDC) citing Refinitiv data suggests that more than 70% and 25% of companies currently listed on IDX meet the minimum capital requirement for listing on Hong Kong’s GEM (which serves small and mid-sized issuers) and main board, respectively. “This implies that there is a huge potential pool of candidates for dual primary and secondary listing,” the report noted.

However, the research added that so far, “only three Indonesian companies domiciled in Indonesia are currently listed overseas, and none are listed in Hong Kong.”

Tech story

Poised to become the seventh largest global economy by 2030, Dawborn underlined Indonesia’s endeavours to become a regional leader for Southeast Asian capital markets, following its success as host of last year’s G20 summit, in Bali.

Already home to a variety of tech unicorns (companies valued at over $1 billion) including Blibli, Bukalapak, Traveloka and GoTo, Indonesia is fast-emerging as a Southeast Asian tech hub, with its internet economy expected to double in value to be worth $146 billion by 2025.

Experts suggest that Indonesia holds significant potential to elevate Asia’s prominence on the global tech stage.

“Where we are in the macroeconomic cycle, with interest rates at an all-time high following another bump by the Fed last week, the landscape is challenging – high interest rates are not the friend of the tech sector. But the minute that inflation starts to settle, I think we’re going to witness the next chapter of Indonesia’s tech story,” Deiner said.

“Traditionally, Southeast Asian companies have always thought of the US when it comes to tech, but the HKEX has worked to be increasingly accommodative for these firms and Hong Kong is starting to prove a very attractive listing venue for those active in biotech,” explained Clifford Chance’s Thio.

“So-called US stock orphan listings (where a company has no operations, investor relations or management in a particular market but chooses to list there) are becoming a real discussion point across the Asian IPO landscape. I agree that Hong Kong may become an increasingly compelling venue for tech firms. In doing so, it supports the regional sector growth story,” Deiner added.

The tech sector is also set to support Indonesia’s efforts in the sustainability space. The market published the first version of its green taxonomy in January 2022.

“The ESG frameworks and disclosure standards of listing venues have become a hot topic in the IPO execution process and in equity offering documents more generally, and the variation in ESG disclosure standards across different international markets is creating a degree of execution friction across transactions in different markets,” Deiner explained.

“I was interested to read that the exchanges highlighted ESG considerations in the MoU as this will hopefully present an opportunity for the two markets to converge on ESG standards.”

“If this leads to a greater uniformity in ESG disclosures across primary equity markets, this could really be a game changer for market activity, and would be a very exciting development to monitor,” he added.

“As Hong Kong already has more developed carbon related, ETF and derivative products and trading systems, Indonesia and the market’s investors will benefit from access to this knowhow and technology,” noted HBT’s Bunjamin.

Jakarta-based corporate partner and capital markets lead, Viska Kharisma, told FA that following the introduction of Indonesia’s Financial Services Omnibus Law in 2023, OJK has been considering marketing more types of offshore securities in Indonesia, including carbon-related instruments.

“We understand that OJK and IDX propose to issue a new carbon market trading regulation in the near future, which should facilitate access by international investors to carbon credit opportunities through Indonesian industrial and mineral companies,” she said.

Reflecting on the opportunity on offer as a result of the official partnership, Deiner shared, “Where there is a cross- or secondary listing as part of a primary offering on any two international exchanges, you’re going to have an element of friction between their respective listing standards and the requirements that one legal jurisdiction or one regulator will impose versus another – and in many ways, the art of dealmaking in large-scale equity capital market (ECM) transactions of this nature, involves getting these two pieces to fit.”

“There’s nothing particularly apparent that has created a roadblock between the markets until now, but then that’s why you have the MoU. Hopefully it will provide a robust basis to ensure that any future obstacles can be navigated or removed,” he concluded.

HKEX declined to comment beyond the press release. IDX, the Indonesian Chamber of Commerce and Industry (KADIN) and a number of Indonesian banks did not respond to requests for comment.

 

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Sustainable Leaders series: Ayala’s path to an ESG driven business | FinanceAsia

With several ESG-backed initiatives in recent years, the Philippines-based conglomerate Ayala has solidified its commitment to sustainability. Operating across verticals including energy, finance, infrastructure, and real estate, Ayala has committed to net zero greenhouse emissions by 2050. The conglomerate’s energy wing ACEN recently created the world’s first energy transition mechanism (ETM) in November 2022, backed by BPI and RCBC.

On the social front, Ayala’s GCash app and BPI’s BanKo have  played pivotal roles in financial inclusion for unbanked Filipinos and small to medium size enterprises. BPI and Globe are currently reviewing their framework to consciously focus on these areas.

When it comes to governance, Ayala’s boards are working towards an appropriate level of diversity and independence. This involves maintaining high standards when it comes to transparency and disclosure.

The 190-year-old company’s social and sustainability initiatives have a long history. Albert de Larrazabal, CFO at Ayala Corporation said, “We have always aligned ourselves to national interest and had very high standards of governance and stewardship. As we must be mindful of the ecosystems we operate under, ESG in various forms has always been part of our value proposition.”

Ayala’s approach to ESG

Today, ESG-based financing is a priority for Ayala. Apart from ACEN’s implementation of the world’s first ETM, Ayala has issued a social bond with the IFC in support of its cancer hospital. Larrazabal said, “We are looking to do KPI-linked social and ESG financing, which incorporates targets into the commercial terms and conditions of the loan.”

Even during the M&A process, the conglomerate is mindful of integrating new acquisitions into its ESG framework. Ayala has also taken steps to ensure that ESG is a priority that is ingrained at the highest levels of the organisation, leveraging its membership with the World Business Council for Sustainable Development (WBCSD). The conglomerate’s board has received training which ensures they can play an active role in tracking and monitoring developments in the ESG space.

Corporates making public commitments to sustainability draw a lot of attention, not all of it positive. Asked how Ayala approaches concerns about greenwashing, Larrazabal said, “Sometimes it happens inadvertently because of incorrect measurements. That’s why we brought in South Pole. We have taken steps to ensure we are on the right track by committing to independent verification, to give people a degree of reassurance.”

Building a model for the APAC region

While the need for sustainable leaders is strongly felt across APAC, many countries in the region have a minimal contribution to emissions — the Philippines emits half the global average on a per capita basis. Larrazabal said, “Between 80% to 88% of our emissions — depending on individual businesses — are scope 3.” These emissions are defined as the result of activities from assets not owned or controlled by a reporting organisation, but which are a part of its value chain. Larrazabal said, “Our scope 3 is somebody else’s scope 1 and scope 2. We need an environment that enables, incentivises, and if that fails, penalises those who disregard scope 1 and 2.”

Many emerging markets grapple with issues similar to those facing the Philippines — adopting renewable energy, while meeting the demands of a growing population and economy. As a result, ETM-like arrangements may be embraced to a greater extent. Asked for his advice on managing such a transaction, Eric Francia, president and CEO at ACEN said, “It is important for investors to reconsider their position on coal, so long as the principles are well understood. One may be investing in a coal plant, but for a good purpose, which is enabling its early retirement.”

Offering a financial perspective on the ETM, TG Limcaoco, president and CEO Bank of Philippine Islands added, “We provided lending and brought in other institutions. We took reduced rates of returns for equity and debt exposure, which allowed us to shorten the life of the plant by 10 to 15 years. It is a big win for everyone involved.”

For more on Ayala’s adoption of ESG and a deeper insight into the world’s first ever ETM, please watch the accompanying video.

 

 

¬ Haymarket Media Limited. All rights reserved.

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Asia's ESG investors must 're-imagine role of capital’ | FinanceAsia

A version of this story was first published by sister title, AsianInvestor.

Infrastructure investors in Asia can promote a new, more ambitious role for capital in funding social and environmental development, according to Nikhil Chulani, investment director covering the industries, technology and services sectors at British International Investment.

“On the markets that we at BII focus on in Africa and South Asia, there are huge opportunities for growth and achieving greater scale,” he told an audience at the Sovereign Wealth Fund Institute conference in London in June.

“To accelerate progress in realising the potential of these opportunities, one key aspect is vision and ambition, and tapping into creative solutions via financial services sector to re-imagine the role of capital.” 

The UK development finance institution currently invests between $1.5 and $2 billion per year in Asia, Africa and the Caribbean.

He noted that, as ESG investing broadens from a focus on people to include the environment, the scope of allocations, and the range of problems they address, is widening. He said developing bottom-up strategies is more important than ever.

Being able to clearly identify and articulate which problems investors are aiming to address with their allocation is crucial, he added, emphasising the need to integrate impact and financial return within an investment model.

“Having an impact doesn’t exist separately from investing, it is a core part of investing,” Chulani said, adding that, while many investors still saw the ESG potential of their investment as distinct from its investment potential, attitudes were changing.

Size matters

Michael Anderson, who was director general between 2010 and 2013 of the UK’s Department for International Development, a government department that was responsible for more than $6 billion in annual aid programmes, said that a pressing question for enterprises and projects with a social or environmental dimension was achieving the scale necessary to unlock large investments.

“It’s not that we need to do more to attract major investors, but when they are attracted they need to have the deal flow to enable large ticket sizes,” he said.

“Big investors with multibillion dollar funds can’t go after small deals,” he added. “The key challenge is thinking at a bigger scale, especially in areas beyond infrastructure.”

“There has been some good investment in green infrastructure, but not enough in other areas,” he noted, pointing to social services, social infrastructure, and businesses designed to have a positive social impact.

Anderson, who is founder and CEO of MedAccess, a social enterprise improving access to medical innovations wholly owned by the British International Investment, gave the example of essential medicines. 

“The critical reason that these drugs are not getting into markets where they are needed is that the companies who manufacture them don’t find it commercially viable to sell into those markets,” he said. 

Investors were essential in providing the “catalytic finance” to de-risk distribution into less profitable markets, he added. 

Anderson gave the example of a recent TB drug project mediated by MedAccess, where the finance provided reduced the per dose cost from $40 to $15. MedAccess also facilitated increased production by the drug company and worked with companies to secure distribution. 

“Sometimes this means lower margins [for manufacturers],” he noted. 

Local opportunities

However, Ana Nacvalovaite, research fellow at the Centre for Mutual and Co-owned Business to Kellogg College, University of Oxford, speaking at the same session, said small-scale, local projects offered considerable opportunities for ESG investors, given their strong social and environmental credentials in many cases.

Such projects that are aimed at securing specific social or environmental outcomes often involve joint investment by development banks alongside sovereign and other institutional investors such as pension funds.

But those institutions best placed to provide such “blended finance” are not necessarily the biggest, Nacvalovaite observed, pointing to the example of funding for rural farm co-operatives in Rwanda.

“The [Government Pension Fund of Norway] has its hands tied, since approval is required by the ministry of finance. But Rwanda’s fund [the Agaciro Development Fund, launched in 2012] could trial this. It is the right size and Rwanda has lots of co-operatives, so they are looking at these blended finance opportunities,” she said.

Nacvalovaite said that while single project investments with a finite lifecycle might produce tangible environmental or social benefits during their lifetime, they also created challenges when they complete.

“The community that has been built up around it has to pack up and move on,” she said.

By contrast, financing co-operatives and employee-owned businesses provided longer lasting social outcomes. “We are talking about people creating their own infrastructures,” she said.

 

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Singapore launches mandatory climate reporting consultation | FinanceAsia

Earlier this month, Singapore’s Accounting and Corporate Authority (Acra), together with Singapore Exchange Regulation (SGX RegCo), instigated a public consultation on a proposed set of mandatory climate-related disclosures (CRDs). The two bodies partnered in June 2022 to form Singapore’s Sustainability Reporting Advisory Committee (Srac).

The public consultation runs from July 6 until September 30, during which the public can access related documents through a portal on Acra and RegCo’s websites and submit feedback via a designated form. The two bodies (Acra and SGX RegCo) plan to consider public feedback and finalise the recommendations by 2024.

If further amendments are proposed to listing rules around sustainability reporting, a separate consultation will launch before the end of the year, SGX RegCo added in a press release.

The mandatory CRDs will require issuers listed on the Singapore Exchange (SGX) to report their climate impact in line with the standards set by the International Sustainability Standards Board (ISSB), starting from financial year 2025 (FY2025). 

Similar requirements for large non-listed companies with annual revenue of over $1 billion will be mandatory starting from FY2027, according to the recommendations. In doing so, Singapore becomes among one of the first markets in Asia to consult on CRDs that are set to affect large, non-listed companies. 

“To transition to a net zero economy, we need the critical mass to move the needle. With more companies adopting climate related disclosures, we are better able to drive actions and impact to meet our climate targets and make Singapore a better and more sustainable place for our future generations,” Esther An, chair of Srac told FinanceAsia.

New requirements

The new recommendations advance the city-state’s current reporting requirements, which were initially introduced in a phased manner in late 2021 to elevate Singapore’s role in Asia’s ESG arena and to uphold its position as a global business hub.

The market’s current CRDs require listed companies active in five prioritised carbon-intensive industries (finance; energy; transportation; materials and buildings; agriculture, food and forest products) to submit data related to their corporate climate impact.

However, the proposed amendments expand these requirements to all issuers listed on the SGX.

All SGX-listed corporates will be required to report their scope 1 and 2 emissions – those direct emissions that result directly from their activity or their production processes. 

Corporates will also be required to submit data around scope 3 emissions – the indirect pollutants that result from the full breadth of a company’s supply chain. However, because these involve more complex calculation, Srac is offering companies one to two years to prepare for these reporting requirements before having to submit exact data, the press release explained.

“Scope 3 emissions are typically the largest component of many companies’ greenhouse gas emissions,” An elaborated to FA.

“To facilitate companies in making the disclosure, the ISSB standards have provided relief. For example, the standards allow the use of estimates to prepare this disclosure when the information cannot be obtained without undue costs and efforts,” she explained.

External assurance on scope 1 and 2 emissions provided by Acra-registered audit firms will be expected from all listed firms starting FY2027, and from large non-listed companies starting FY2029, according to the recommendations. 

Dominoes

Commenting on the new disclosure requirements, Helge Muenkel, chief sustainability officer at DBS Bank told FA, “By starting with economically significant non-listed companies in Singapore, the goal is to eventually create a domino effect with better quality ESG data across the value chain, especially in relation to scope 3 emissions.”

As a Singapore-headquartered lender, DBS has been an active participant in Singapore’s sustainability effort. The bank announced in early July that it had upskilled over 1,600 institutional banking relationship managers and 170 credit risk managers to deepen their knowledge of sustainable financing practices, in order to better help corporate clients navigate the sustainability landscape.

Last September, market regulator, the Monetary Authority of Singapore (MAS) and SGX collaborated to launch a platform, ESGenome, aimed at enhancing companies’ ESG reporting processes, FA reported.  The assistance provided by the capability includes processes for sustainable procurement across supply chains.

To further facilitate large non-listed companies that are new to climate reporting, Srac suggests that scope 3 emissions need only be disclosed in the third year of mandatory reporting, An added.

The Srac team confirmed that mandatory CRDs for large non-listed companies with revenue over $100 million is set to commence from FY2030, but this timeline will be further reviewed in 2027, depending on the outcome from implementation of the current recommendations. 

“With more countries pledging for net zero and the rising carbon cost globally, climate strategy and reporting can help companies, listed or non-listed, to mitigate and adapt to risks in the transition to a low carbon economy,” An said. 

Whether the requirements will expand to include other aspects of ESG-related reporting remains undecided. The recommendations begin with CRDs as a starting point, An said, emphasising the urgency to combat climate change.

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Ayala’s path to an ESG driven business | FinanceAsia

With several ESG-backed initiatives in recent years, the Philippines-based conglomerate Ayala has solidified its commitment to sustainability. Operating across verticals including energy, finance, infrastructure, and real estate, Ayala has committed to net zero greenhouse emissions by 2050. The conglomerate’s energy wing ACEN recently created the world’s first energy transition mechanism (ETM) in November 2022, backed by BPI and RCBC.

On the social front, Ayala’s GCash app and BPI’s BanKo have  played pivotal roles in financial inclusion for unbanked Filipinos and small to medium size enterprises. BPI and Globe are currently reviewing their framework to consciously focus on these areas.

When it comes to governance, Ayala’s boards are working towards an appropriate level of diversity and independence. This involves maintaining high standards when it comes to transparency and disclosure.

The 190-year-old company’s social and sustainability initiatives have a long history. Albert de Larrazabal, CFO at Ayala Corporation said, “We have always aligned ourselves to national interest and had very high standards of governance and stewardship. As we must be mindful of the ecosystems we operate under, ESG in various forms has always been part of our value proposition.”

Ayala’s approach to ESG

Today, ESG-based financing is a priority for Ayala. Apart from ACEN’s implementation of the world’s first ETM, Ayala has issued a social bond with the IFC in support of its cancer hospital. Larrazabal said, “We are looking to do KPI-linked social and ESG financing, which incorporates targets into the commercial terms and conditions of the loan.”

Even during the M&A process, the conglomerate is mindful of integrating new acquisitions into its ESG framework. Ayala has also taken steps to ensure that ESG is a priority that is ingrained at the highest levels of the organisation, leveraging its membership with the World Business Council for Sustainable Development (WBCSD). The conglomerate’s board has received training which ensures they can play an active role in tracking and monitoring developments in the ESG space.

Corporates making public commitments to sustainability draw a lot of attention, not all of it positive. Asked how Ayala approaches concerns about greenwashing, Larrazabal said, “Sometimes it happens inadvertently because of incorrect measurements. That’s why we brought in South Pole. We have taken steps to ensure we are on the right track by committing to independent verification, to give people a degree of reassurance.”

Building a model for the APAC region

While the need for sustainable leaders is strongly felt across APAC, many countries in the region have a minimal contribution to emissions — the Philippines emits half the global average on a per capita basis. Larrazabal said, “Between 80% to 88% of our emissions — depending on individual businesses — are scope 3.” These emissions are defined as the result of activities from assets not owned or controlled by a reporting organisation, but which are a part of its value chain. Larrazabal said, “Our scope 3 is somebody else’s scope 1 and scope 2. We need an environment that enables, incentivises, and if that fails, penalises those who disregard scope 1 and 2.”

Many emerging markets grapple with issues similar to those facing the Philippines — adopting renewable energy, while meeting the demands of a growing population and economy. As a result, ETM-like arrangements may be embraced to a greater extent. Asked for his advice on managing such a transaction, Eric Francia, president and CEO at ACEN said, “It is important for investors to reconsider their position on coal, so long as the principles are well understood. One may be investing in a coal plant, but for a good purpose, which is enabling its early retirement.”

Offering a financial perspective on the ETM, TG Limcaoco, president and CEO Bank of Philippine Islands added, “We provided lending and brought in other institutions. We took reduced rates of returns for equity and debt exposure, which allowed us to shorten the life of the plant by 10 to 15 years. It is a big win for everyone involved.”

For more on Ayala’s adoption of ESG and a deeper insight into the world’s first ever ETM, please watch the accompanying video.

 

 

¬ Haymarket Media Limited. All rights reserved.

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SUSTAINABLE FINANCE POLL 2023: Asian debt markets sharpen ESG focus | FinanceAsia

It’s looking increasingly like the time for sustainable finance to shine. After a fall in the year-on-year volume of green, social and sustainability (GSS) instruments globally during 2022, a rebound is forecast this year – to around US$1 trillion in issuance, forecasts S&P Global.

Asia Pacific (APAC) is well-placed to capitalise on this upswing. S&P Global’s projections, for example, are that GSS issuance volume in the region will jump by as much as 20%, to reach US$240 billion, roughly a quarter of the global landscape.

The longer-term story looks promising, too, especially amid ambitious climate goals. Even in South-east Asia alone, about US$180 billion needs to be invested in clean energy projects every year until 2030 to keep the transition journey on track, based on the International Energy Agency’s Sustainable Development Scenario. Putting this in context, from 2016 to 2020, investment in clean energy was $30 billion per year, on average.

Adapting to climate change is certainly a key driver. But according to more than 100 investors and borrowers in APAC who took part in the 6th annual poll by ANZ and FinanceAsia in April and May 2023, multiple dynamics indicate an ever-bigger role for GSS instruments.

Among the key factors is a mix of policy and regulatory initiatives to foster greater transparency. This should, in turn, boost investor demand and issuer appetite. At the same time, as this segment of the region’s capital market continues to mature, active GSS bond investors and issuers can expect greater potential for newer formats of issuance to help bridge social and environmental priorities such as biodiversity and gender equality.

10 top takeaways from the survey

  1. 92% of all respondents have integrated GSS factors within their strategy, with 77% confirming that the market volatility over the past 12-18 months either hasn’t changed or has increased their focus on GSS.
  2. Nearly half (49%) of investors now have their own in-house ESG research and analysis capability, a notable increase from the 42% poll finding 12 months ago.
  3. 70% of investors have some type of experience with sustainable finance, with bonds much more popular than loans.
  4. While just under one-third of investors have exposure to transition finance instruments, another 45% are interested in investing in them, either in the next year or over the medium to long term.
  5. Although 92% of investors haven’t yet invested in Orange (gender equality) bonds, half of them say they would do so if they were more widely available.
  6. 88% of investors and 90% of borrowers believe further regulation of sustainability and sustainable finance would have a positive impact on the market overall.
  7. 49% of investors and 41% of issuers say a ‘greenium’ of at least 4 bps is typically priced-in to new GSS bond issues.
  8. Alignment with sustainability objectives, better access to capital and investor diversification are the top three drivers for issuers of GSS instruments.
  9. Time, availability of targets and set-up cost are the biggest hurdles to issuing GSS instruments.
  10. Only 19% of borrowers have never issued a GSS instrument – compared with 64% in last year’s poll.

Read more survey findings and analysis here

 

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