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Singapore advances plan for first sovereign green bond despite debt market turmoil

21 June 2022 Max Tingyao Lin

Singapore has moved forward with its plan to issue its first sovereign green bond this year despite global debt market turbulence amid worsening inflation.

On 9 June, the Ministry of Finance unveiled the Singapore Green Bond Framework detailing governing principles for bonds sold by the government and statutory boards while promising the inaugural issue will arrive "in the coming months."

When strengthening its climate commitment to net-zero emissions by 2050 earlier this year, the city state said it would sell green bonds worth up to S$35 billion ($25.2 billion) by 2030 to fund a low-carbon transition.

Several central banks in major economies—including the US Federal Reserve—have been hiking interest rates to counter rising energy and food prices in recent months, resulting in increased borrowing costs and weakness in global bond markets.

But analysts said Singapore's green issuance could enjoy strong pricing while consolidating its status as Southeast Asia's top financial hub, with the country's top-notch sovereign rating likely to generate strong interest from investors amid tumultuous market conditions.

Krista Tukiainen, head of market intelligence at UK-based nonprofit Climate Bond Initiative (CBI), said investors' "flight to quality" can benefit Singapore at a time when it faces less competition.

"There's not as much quality volume from sovereign bonds, especially green labeled, coming out … It could actually be a good moment to get some good outcomes," Tukiainen told Net-Zero Business Daily by S&P Global Commodity Insights.

The Singapore showcase

For Singapore, the upcoming issue will not only raise funds for low-carbon infrastructure, but provide a chance for the country to showcase its governance of green finance to the region, some in the local investment sector say.

The Green Bond Framework, which aligns with the International Capital Market Association's (ICMA's) Green Bond Principles 2021 and the ASEAN Green Bond Standards 2018, details how the Singaporean government plans to use the proceeds and govern the funded decarbonization projects. It was recognized by Morningstar Sustainalytics in an external review for its credibility, impact, and alignment with international standards.

"Singapore's sovereign green bonds will be of interest to both domestic and international investors. The features of the framework check all the right boxes to alleviate concerns raised by international investors previously on investing in green bonds or other kinds of green finance in the region," said Anjali Viswamohanan, senior policy manager at the Asia Investor Group on Climate Change.

With investors and other stakeholders often questioning the environmental credentials of sovereign green bonds in Southeast Asia, Viswamohanan told Net-Zero Business Daily: "In the long run, these concerns are a threat for the green finance sector in … a region that is in dire need of finance to support its transition. Singapore can play a major role in combating these concerns."

In a 9 June statement, Clifford Lee, global fixed-income head at DBS Bank, said the framework can serve as a good reference for environmental, social, and governance financing in Asia.

CBI data showed total green bond issuance in Singapore totaled $8.1 billion in 2021, more than any other Southeast Asian country. Second-ranked Thailand issued $800 million in green debt.

Moreover, a national government's governance structure for green bonds can often be adopted by the private sector. Lee, whose company advised the Singaporean government, expects the framework to drive "more high-quality public and private green bond issuances to fuel the nation's climate ambitions."

S&P Global Commodity Insights Research Analyst Hui Min Foong also believes the framework will help Singapore attract investment in low-carbon projects. "Proceeds from the bonds could be used for a variety of green infrastructure projects," Foong said.

According to the framework, Singapore will only use the bonds to finance nationally significant infrastructure projects that are owned by the government, cost at least $4 billion, have a project lifespan of at least 50 years, among other criteria.

Those projects will also need to fall under the categories of renewable energy, energy efficiency, green buildings, clean transportation, sustainable water and wastewater management, pollution prevention, control and circular economy, climate change adaptation, and biodiversity conservation and sustainable management of natural resources and land use, with references to ICMA and CBI technical criteria.

The Monetary Authority of Singapore, the country's central bank, will be responsible for issuing and managing the sovereign green bonds.

"We are committed as one government to taking bold and decisive actions to tackle climate change, finance sustainable infrastructure, and catalyze the green economy," Singapore Second Minister for Finance Indranee Rajah said in an industry event earlier this month. "The publication of our Singapore Green Bond Framework is yet another important step forward in this regard."

Bearish market

The country's inaugural green issue is highly likely to arrive amid heightened market risks on the macro-economic front. Many companies and governments have refrained from tapping into the bond markets in recent months amid rising borrowing costs.

Global bond issuance amounted to $17.6 trillion in total between January and May 2022, down 30% from $25.1 trillion in the same period of last year, according to estimates by industry group Institute of International Finance.

"All bonds are being impacted by the volatile macroeconomic conditions … Most of the sell-offs in all types of bonds [come from] inflation," said Chris Fenske, head of capital market research at S&P Global Market Intelligence.

"Actual credit concerns are building which will also increase yields and represents heightened risk of default," Fenske told Net-Zero Business Daily.

Environmental Finance Data, which aims to track all self-labeled green bonds without discrimination, estimated the value of green bond sales in January-May at $182 billion—representing a year-on-year fall of 15.2%.

Observers said fewer issuers were entering the markets as a result of persistent worries among investors over rising interest rates and energy security, prompted by Russia's invasion of Ukraine since end-February.

The S&P Green Bond Index, which evaluates the market's performance by investors' return, fell from 147.87 at the beginning of this year to 128.62 on 31 May before a further drop to 121.38 on 17 June. It hit a record low of 120.47 on 14 June.

In general, Tukiainen said corporate green bonds issued this year failed to achieve a "greenium" like they had last year.

"They aren't performing as well for the issuers as they had before. Their pricings are almost equivalent to the vanilla bonds," Tukiainen added.

As for sovereign green bonds, CBI—which only tracks bonds that meet its environmental criteria—estimates global issuance fell to $23.2 billion in the first five months of this year from a year-ago level of $34 billion.

Tukiainen attributed the lower issuance to national governments' tendency of seeking long-term borrowing, which would be theoretically disfavored by investors amid inflation.

Still, anecdotal evidence suggests sovereign green bond issuers with strong credit rating are well received.

In its green bond debut last month, Austria raised €4 billion ($4.2 billion) from a May 2049 issue that its treasury said achieved a "greenium" worth 2.5 basis points.

Agence France Trésor—France's national debt management agency—also did well last month when selling a syndicated green inflation-linked bond due in July 2038, whose interest payments move in line with the rate of inflation in EU member states. The country's €3 billion-issue attracted bids totaling €24 billion and was priced at a real return of -0.926%, "the lowest level of real rate ever observed" in a syndicated bond issued by France, the agency said.

Posted 21 June 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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