BNP AM

The sustainable investor for a changing world

In their white paper, “Sustainable Asian cities – preparing now for the future”, our Emerging Markets Debt team and Sustainability Centre detail the rationale underpinning a new investment strategy which targets companies that can help Asian cities achieve the sustainable changes they need to make to deal with an over-stretched infrastructure, migration and climate change.  

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 population. [1]

With such steep growth, the current urban infrastructure simply will not cope. Add to that the impact of increasingly frequent and severe climate events, and the need for Asian cities to achieve more sustainable change has never been more urgent. Upgrading current infrastructure is essential to ensure that these cities become more resilient to the economic, social and climate challenges.

At the human level, they will need to be upgraded to ensure that they remain habitable. Already, the proportion of sub-standard housing in need of redevelopment in several Asian countries 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 congestion and air or water pollution.

Infrastructure funding need could exceed USD 1 trillion

Such problems often arise from inadequate government funding, poor access to financing and inefficient local planning and management. Sizeable investment is needed to help Asian cities shift to a future that is more environmentally sustainable, focused on low carbon, and more inclusive.

Asia’s urban infrastructure need is estimated to exceed USD 1 trillion by 2050, up by 7% a year from 2017. Additionally, to resolve the problem of inadequate access to clean water, the water market in Asia is expected to grow by over 4% a year in the near term.

Opportunities across broad sub-themes

To help tackle such issues, BNP Paribas Asset Management’s new Sustainable Asian Cities fixed income strategy is designed to target opportunities in five critical areas: 

  • Enhancing urban mobility, incorporating low-carbon elements where possible
  • Improving basic infrastructure to help cities operate and thrive, as well as improving their resilience to extreme weather events
  • Promoting integrated development to balance a mix of social, economic and nature-based activities
  • Building health and education facilities to increase provision and improve access
  • Supporting innovative technological solutions for sustainable city development. 

 A growing market

‘Green financing’ has grown significantly in Asia in recent years, particularly in the form of sustainable-labelled bonds (green, social, and sustainability (GSS) bonds) and sustainability-linked bonds. While such bonds have been available for some time in more mature and developed markets in Europe, they are relatively new in Asia. That said, total issuance in Asia reached more than USD 60 billion in 2021 (see Exhibit 1). We expect this segment to expand, given the growing investor demand and greater regulatory support.

Our Sustainable Asian Cities strategy is designed to invest in a mixture of GSS and sustainability-linked bonds (collectively known as sustainable-labelled bonds) as well as conventional bonds from issuers that derive at least 20% of their revenues from this theme.

We estimate the size of the universe of potentially eligible conventional bonds (excluding convertibles and non-USD denominated bonds) to be more than USD 110 billion (outstanding securities as of October 2021). Adding the universe of potentially eligible sustainable-labelled bonds of more than USD 120 billion, the total exceeds USD 230 billion. We expect this to grow over time.

Tapping into the ‘greenium’ – and a good entry point

Furthermore, we believe this strategy allows investors to tap into the growing green premium (‘greenium’) of GSS bonds in Asia. Research by our Quantitative Research Group has shown the existence of the greenium in these bonds. We expect this premium to widen as the market grows.

Finally, in the broader fixed income market, spread widening in Asian high-yield (HY) bonds should provide investors with an attractive entry point, especially since we believe the market is now at an inflection point after the explicitly dovish policy tone from Beijing in recent weeks. Furthermore, emerging market (EM) debt valuations generally look compelling now. We see this as one of the few fixed income asset classes providing good entry points in the middle of the US Federal Reserve’s policy tightening cycle as spreads are high compared to other fixed income asset classes.


Download the pdf 


References

[1] United Nations. 2014. “World Urbanization Prospects”

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