Asia impact bonds: No shortage of investment opportunities

Impact bonds - a two-in-one investment solution that aims to infuse investment returns and social and environmental contributions - is gaining popularity in Asia. A proliferation of issuance can be seen across markets, including China, Japan, South Korea, India and Hong Kong. Before moving on, let us review what impact bonds are.

Impact bonds can be divided into three categories: Green Bond, Social Bond and Sustainability Bond. Similar to traditional bonds, returns of impact bonds can be generated from regular coupon payments as well as capital gains realized by bond trading. Proceeds raised from traditional bonds can be allocated to any purposes, such as debt payment or corporate expenses. But the majority of funds raised from impact bonds must be earmarked to projects that benefit the environment or society with measurable outcomes. Corporates must also provide regular updates on the use of proceeds, status of the projects and impacts, among others. In view of the aforementioned special requirements, Asia impact bonds are primarily issued by investment grade issuers with robust credit fundamentals.

According to data from the Intercontinental Exchange, China surpassed France to become the world's top impact bond issuer last year. Led by China, Japan and South Korea, Asia Pacific's impact bond market rose to US$2.41 billion last year, trailing that of Europe. The market saw issuers spanning across a plethora of areas, such as government, financial, tech, transportation, manufacturing, construction and property. Unquestionably, Asia's impact bond market is showing signs of growth in many aspects.

How green, social, and sustainability bonds can contribute to environmental protection and society

Funds raised by green bonds are designated to help improve the environment. A Hong Kong property firm issued nearly HK$8 billion worth of green bonds, of which 98% was spent on green buildings, while the rest was respectively allocated to boosting energy efficiency and renewable energy. Projects included the installation of rooftop evacuated-tube solar thermal collectors to generate solar power, subsequently cutting carbon emissions annually by 200,000 kgCO₂e. Environmental impacts as such had to be spelled out in detail in annual reports.

As climate change exacerbates, so is social inequality. Corporates that aim to tackle social challenges such as employment, healthcare, housing and education can issue social bonds. One AAA rated South Korean financial company has repeatedly issued social bonds, raising funds to facilitate access to long-term and stable housing finances for low and middle income earners. So far, the issuer has provided mortgage loans to about 110,000 households and strengthened housing stability of 3000-plus vulnerable groups.

As for sustainability bonds, proceeds raised can be allocated to tackle both environmental and social challenges. One Chinese tech giant has recently issued nearly US$1 billion worth of sustainability bonds, raising funds for areas including green buildings, green transportation, and healthcare services. These projects included the donation of 200 fundus cameras and 10 sets of primary medical solutions, as well as the production of automated vehicles to promote clean transportation.

Asia's economic fundamentals remain favourable, and its bond market has considerable breadth and depth. The region's impact bond market has also steadily flourished in the past few years, with a growing diversification of issuers across countries and sectors. Investors who are interested in generating stable income while playing a part in contributing to environmental conservation and society can keep an eye out for the investment opportunities.