ESG Club
SUSTAINABLE CHANGE FOR ASIAN CITIES
Compared to the developed world, the urbanisation theme is more prevalent in emerging markets (EM). Covid-19 has forced developed markets to reassess the pace of urbanisation, and may have even triggered some gradual de-urbanisation due to the prevalence of remote working and the reassessment of the work/life bal- ance. By contrast, the pace of urbanisa- tion in EM remains strong, particularly in Asia. This has made the sustainability of cities in the region more of a challenge. We believe there is an attractive opportu- nity for investors to address this issue. Home to more than 4.5 billion people, Asia is the world’s largest and fastest growing economic region and its urban centres are some of the world’s densest. By 2050, some 1.2 billion more people will live in Asian cities, and the region will account for more than half of the world’s urban population¹ With such steep
growth, the current
urban infrastructure simply will not cope. Add to that the impact of frequent and severe climate events, and the need for Asian cities to achieve more sustainable change has never been more urgent. Upgrading infrastructure is essential to make these cities more resilient to the economic, social and climate challenges. At the human level, they will need to be upgraded to ensure that they remain hab- itable. Already, the proportion of sub- standard housing in several Asian coun- tries ranges from 23% to 62% of the total. Many residents suffer from inadequate access to clean water, sanitation and power, as well as the effects of traffic con- gestion and air or water pollution. Such problems often arise from inadequate
government funding, poor access to pri- vate financing and inefficient local plan- ning and management. Sizeable investments are required to make Asian cities more environmentally sustainable and inclusive. According to the McKinsey Global Institute², Asia’s urban infrastructure need is projected to exceed $1trn (£815.3bn) by 2050, up 7% per annum from 2017. Additionally, due to the inadequate access in some parts of Asia, the water market is expected to grow by more than 4% a year in the near term.³
A growing market Adding to the market development per- spective, we have been seeing a signifi- cant proliferation in ‘green financing’ in Asia, particularly in the form of sustaina- ble-labelled bonds (green, social and sus- tainability (GSS) bonds) and sustainabili- ty-linked bonds. While such bonds have been available for some time in more mature markets in Europe, they are rela- tively new in Asia. That said, the market for these bonds has grown during the past five years, with US dollar issuance in Asia reaching more than $60bn (£48.9bn) in 2021 (see chart). We expect this segment to continue to grow, given the increasing demand from investors and greater regu- latory support.
PI Partnership – BNP Paribas Asset Management
Participating and investing in sustaina- ble change for Asia cities Now that we have established the invest- ment case for investing in a greener and more sustainable future for Asia cities, we come to the central question: how should investors participate in this emerg- ing and fast-growing theme? In our view, the need for capital in Asia to make cities more sustainable is secular rather than a passing fad. Approaching this theme from a fixed income point of view makes sense as there is a direct link with the capital. Infrastructure projects in Asia are capital intensive, and often require more than one round of cash injections. This fits with the nature of fixed income: bonds are typically issued in multiple rounds, as compared to equity financing. We see this as a long-term opportunity, marked by sufficient demand, and most importantly, continued growth.
The full whitepaper can be read at:
investors-corner.bnpparibas-am.com
1) United Nations. 2014. “World Urbanization Prospects” 2) Sustainable Cities Strategy: Financing Solutions for Develop- ing Sustainable Cities in Asia, Asian Infrastructure Investment Bank, December 2018. 3) GWI. Consultant’s analysis. Sustainable Cities Strategy: Financing Solutions for Developing Sustainable Cities in Asia, Asian Infrastructure Investment Bank, December 2018.
Issuance of Asia USD GSS and sustainability-linked bonds (in US dollars)
10 20 30 40 50 60 70
0 2017 Green bonds 2018 Social bonds 2019 Sustainability bonds 2020 2021 Sustainability-linked bonds Source: Bloomberg, year-to-date, as of 6 April 2022
For professional investors. BNP PARIBAS ASSET MANAGEMENT UK Limited, “the investment company”, is au- thorised and regulated by the Financial Conduct Authority. Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom.
www.bnpparibas-am.co.uk This article is issued by the investment company. Investors considering subscribing for the financial instruments should read the most re- cent prospectus or Key Investor Information Document (KIID) available on the website. Opinions included in this article constitute the judgement of the investment company at the time specified and may be subject to change without notice. This article does not constitute or form part of an offer or invitation to subscribe for, underwrite or purchase an interest in any strategy. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial investment. Past performance is not a guide to future performance.
38 | portfolio institutional | June 2022 | issue 114 YTD 2022
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