China is likely to outperform the world for a second year on green and sustainable finance, thanks to policy support for industries and financial products with environment, social and governance (ESG) benefits, according to bankers. Greater awareness and a sense of urgency by companies and investors on the need for climate mitigation and other sustainability actions will act as catalysts and spur the issuance of green bonds, said Puja Shah, the head of ESG debt capital markets for Asia excluding Japan at JPMorgan. “We expect China to continue to outperform due to its pledge to become carbon neutral by 2060, which has driven the growth of low carbon industries such as renewable energy and electric vehicles,” she said. “Issuers in these sectors are accessing the ESG bond markets to drive their capital expenditure.” In 2022, mainland China was the Asia-Pacific region’s top issuer of green, social, sustainable and sustainability-linked bonds at US$86.5 billion, 7 per cent higher than 2021, according to Refinitiv. However, when combined with issuances in Hong Kong, the total was flat year on year at US$92.1 billion. Globally, the volume declined 26 per cent to US$707 billion, while in Asia-Pacific excluding Japan deals fell 4 per cent to US$146.6 billion. Increasing green bond issuances by Chinese banks to fund their growing ESG lending will also drive volume this year, Shah said. Mainland Chinese banks extended US$7.5 billion in green and sustainability-linked loans in 2022 to US$7.5 billion, a 372 per cent year-on-year surge, while globally the volume declined 7 per cent to US$660 billion, according to Refinitiv. Last year, global bond issuances fell in most markets because of sharply higher interest rates, which dampened issuance for all types of bonds. In China, however, interest rates fell slightly. China property junk-bond party is here as December rush delivers 65 per cent bonanza Global ESG bond issuances are tipped to rebound strongly to a record US$1.1 trillion in 2023, according to a BofA Securities report this month. Amid greater interest rate stability and a clearer outlook, overall bond issuances in Asia excluding Japan are tipped to rise to US$170 billion this year from US$158 billion in 2022, JPMorgan forecast. ESG bonds are expected to account for around 40 per cent of the pie. Favourable policies will continue to support issuances in China , said Chen Jianheng, the head of fixed income, currencies and commodities research at CICC Research. Last July, China updated its green bond principles , unifying issuance criteria and setting standards that are more in line with international practices . “With further [fine-tuning] of the definition of green bonds and optimisation of vetting and approval procedures, the efficiency of green bond issuance has been enhanced,” Chen said. “Demand for green bonds from various funds has also strengthened.” ESG wealth management products issued by banks have increased, while some top asset management companies have established ESG investment and research departments, he added. Greater Bay Area cities accelerate efforts to lead China decarbonisation Meanwhile, global sustainability-linked bonds fell 31 per cent to US$63 billion last year. It was partly due to investors’ concerns about overly ambitious performance targets and penalties – typically in the form of a higher bond coupon rate – set by issuers, amid a rising interest rate environment, BofA said. Unlike green, social and sustainable bonds, sustainability-linked bonds are not dedicated to specific projects, but their issuers have to pay a penalty if they fail to achieve certain sustainability performance benchmarks. China’s sustainability-linked bonds, which grew 76 per cent to US$2.5 billion last year, are likely to rise further this year, Chen said. “These bonds could help companies, especially those which cannot issue green bonds due to a lack of green projects, achieve [their sustainability] goals,” he said.