The rise of green loans

The green finance market could reach RM6b by year-end, says RAM Sustainability

by SHAZNI ONG/ pic by TMR FILE

GREEN financing is expected to gain further traction as investors look for financial instruments which could lead to positive social outcomes, experts observed.

RAM Sustainability Sdn Bhd head of sustainability services Gladys Chua said the Malaysian green bond/sukuk market started expanding from 2017 onwards following the first green sukuk issuance by Tadau Energy Sdn Bhd for its solar power plant financing.

“Green financing is recognised as an important avenue to raise awareness and funding for Malaysia’s transition to a more environmentally sustainable solution.

“We expect green financing to keep its upward momentum given the continuous need for low-carbon infrastructure, yet equitable in this current pandemic situation,” she told The Malaysian Reserve (TMR) in an email correspondence recently.

Chua observed that green bonds have been primarily used to finance renewable-energy (RE) projects awarded under the government’s large-scale solar (LSS) and small hydro programmes, but noted that financing for green buildings are also gaining traction.

“We have seen a gradual growth in new green bond issuers in our market with three each in 2017 and 2018, and four in 2019 with a total issuance of about RM5 billion to date.

“Our supportive regulatory environment and incentives have helped to contribute to the growth of this market.

“The green finance market could likely reach RM6 billion by the end of this year, backed by solar, small hydro and green building financing,” she added.

iFAST Capital Sdn Bhd fixed income analyst Ganageaswaran Arumugam said given the similar risk-return profile of green sukuk to that of a regular sukuk, the growth of green sukuk issuance should very well be in line with the regular sukuk.

“Amid the ongoing market turmoil, it would be a challenge to isolate green sukuk from regular sukuk (given their similar risk-return profile) as investors’ concern would predominantly be occupied by yield, given the low-interest rate environment,” he told TMR recently.

Ganageaswaran observed that the pandemic of Covid-19 has seen issuers (outside Malaysia) stepping up to issue environmental, social and governance/social bonds in response to alleviate the social consequences of the virus, predominantly in the labour market.

“One such example is the European Investment Bank to support European companies. While it’s too early to say if Malaysian issuers will follow suit, the global trend does look encouraging.

“An example from a transaction earlier this year is from Halpro Engineering Sdn Bhd, which is an independent power producer that operates a solar plant in Pekan. The programme was rated AA3 by local rating agency RAM Holdings Bhd,” he said.

Ganageaswaran added that green sukuk issuance in Malaysia is a relatively new segment of the corporate sukuk market as it was only in 2017 that the first green Sustainable and Responsible Investment (SRI) sukuk was issued (under the Securities Commission Malaysia’s SRI sukuk framework).

Given the relatively new nature of this segment, green sukuk issuance as a percentage of total sukuk issuance in Malaysia is still small.

“In 2017, the percentage of corporate green SRI sukuk of total sukuk issuances was a mere 2.21%. In 2019, that number shrank to 1.25%,” he said.

Moving forward, Ganageaswaran expects green SRI issuance to pick up in the long run, along with growing awareness on the importance of sustainability investing.

“Growing incentives provided by the government such as tax deduction on the issuance costs of SRI sukuk, and tax incentives under Malaysian Investment Development Authority and Green Tech Malaysia, to name a few, could help with the growth of SRI sukuk,” he said.

HSBC Bank Malaysia Bhd recently noted that green financing instruments are on the rise in South-East Asia, demonstrating the region’s response to issues linked to environmental degradation.

According to the Asean Green Finance State of the Market 2019 report, a Climate Bonds Initiative, which is supported by HSBC, Asean issuance almost doubled, reaching US$7.8 billion (RM33.46 billion) in 2019 from US$4.1billion in 2018. Two-thirds of the proceeds are allocated to the buildings and energy sectors.

The report also noted that Asean issuance represented 3% of the global total and 12% of the Asia-Pacific region in 2019, up from 1% and 5% in 2018 respectively, while cumulative Asean issuance since 2016 stood at US$13.4 billion as of Dec 31, 2019.

Globally, the volume of green bonds and loan issuances rose sharply by over 50%, from US$171 billion in 2018 to US$258 billion in 2019, buoyed by strong interest from both investors and issuers.