This report explores opportunities for investment in sustainable finance projects and its constraints within the Asia Pacific region. The analysis conducted is based on an investor survey of 161 respondents and a separate issuer survey of 154 respondents, from Australia, New Zealand, Japan, Hong Kong and Singapore.

The primary constraint on sustainable finance growth in the region has been a low supply of bankable projects, relative to high demand from investors. This supply-demand gap will remain an issue in the short to medium term and is reflected with only 7% of issuers have used sustainable finance instruments to fund their projects.

Key findings:

• Investors are bullish: This is evidenced as assets under management (AUM) is expected to increase from 30% to 41% over the next 3 years, suggesting confidence within this space.

• Sustainability is good business: Most investors and issuers say sustainable investments are better than traditional equivalents and advantageous for shareholder and investor engagement.

• Finance renewables and energy efficiency: Among issuers, 45% are currently financing or refinancing energy efficiency projects, while 43% finance renewable energy projects. Almost half of investors, also plan to invest in such areas.

• Varying investor motivations: There are differences in focus between countries with Asia Pacific. In Hong Kong and Japan diversification is emphasised, while in Australia, New Zealand and Singapore there is a focus on sustainability outcomes.

• Assurance from issuers and investors: The largest concern for issuers’ is ambiguity in what qualifies as a green or sustainable asset. This is a barrier for companies to invest in ESG focused projects.

Focus areas going forward, include:

• Match demand with supply: There has been greater scope and sophistication in recent years, which is reflected through an exponential increase of ‘green bond’ issuances. While Asia Pacific still has a relatively lower supply of such bonds compared to other regions, nearly 9 in 10 of surveyed companies intend to issue sustainable financing in the next year.
• Widen the scope: There needs to be a greater variety in type of sustainable finance projects available, aside from energy. An emerging financial instrument within the region could be the “transition bond”- where not all the activities may be ‘green,’ and but can assist firms achieve environmentally friendly outcomes.
• Clarity and mindset change: An apparent grey area arises when assessing the qualifying criteria for green and sustainable assets. 25% of issuers view this as the biggest obstacle to sustainable financing, while only one fifth seek certification from the Climate Bonds Initiative (CBI), an international not-for-profit organisation. 68% of investors and 63% of issuers suggest they have outperformed traditional ones; therefore, it would be beneficial to establish a clearly defined policy and framework on the constitution of ‘green’ assets.

Through channeling and attracting funds to the right areas, sustainable finance can help societies build climate resilience and aid the environmental crises faced. Although there are apparent barriers within the market, increased issuance of green bonds, encouraging issuer/investor sentiment and enhanced recognition of ESG criteria in reporting, can enable positive change within Asia Pacific.

1. Significant amounts of investment in sustainable projects need to take place, in order for companies to mitigate their potential climate risks and also for countries to minimise negative externalities to the environment.
2. A viable sustainable finance market is taking shape in a region to channel commercial investor funds, and both investors and issuers say they are achieving a financial benefit from their investment and financing activities.
3. The chief constraint on sustainable finance growth in the region has been the limited supply of bankable sustainable projects.
4. Analysis of sustainable finance was based on the surveys from two groups: investors and issuers. Among organisations from the issuer survey, only 7% have used sustainable finance instruments to fund projects, however 87% intend to do in within the next year. A significant amount of investors have also indicated they want to deploy a greater proportion of capital to 'green' financial instruments over the next three years.
5. As the supply of projects issued and financing increases, the AUM allocated to sustainability will also increase.
6. The majority of investors (68%) and issuers (63%) say sustainable investments and financing have superior performance compared to traditional equivalents.
7. Financing is weighted towards renewables and energy efficiency. Regionally, 45% are currently financing or refinancing energy efficiency projects, such as green buildings, while 43% are financing renewable energy projects. However, to boost resilience to climate change, more must be invested in other areas such as land use, water use and forestry.
8. The motivation and rationale for investing varies significantly based on region, with regard to sustainable projects. Asia Pacific investors aim for financial benefits, such as portfolio diversification, while those in Hong Kong/Japan focus more on diversification and Aus/New Zealand and Singapore investors are focused on achieving sustainability outcomes.
9. Issuers and investors need assurance regarding qualified sustainable assets. The main obstacle for issuers' has been the criteria or what qualifies as green or other sustainable assets. This is a barrier for sustainable project funding in the Asia Pacific region.
10. Although a market with viable green financial instruments is an achievable objective, there are a number of market deficiencies in the Asia Pacific region which need to be addressed. There needs to be greater awareness and recognition on the significance of ESG criteria within reporting and greater support and influence of governments.