Green bond issuance in major Asia-Pacific economies will likely accelerate over the coming months, as most central banks are nearing the end of interest rate hikes that hindered activity in the first quarter.

Issuance of green bonds that meet international standards declined in China and Japan, the region's largest issuers, during the first three months of the year, according to data from nonprofit Climate Bonds Initiative. Compared with the same period last year, China issued $13.67 billion of aligned green bonds, down from $20.38 billion, and total green bond issuance, including so-called nonaligned bonds, fell to $22.80 billion from $35.93 billion.

"As interest rate increases taper off and global market conditions stabilize, we expect issuance level out of China to slowly improve in coming months," said Gloria Cheung, a capital markets partner at law firm Linklaters.

Higher rates

While most central banks were hiking rates to rein in price increases, activity in sustainable debt markets slowed globally amid uncertainty for issuers and investors. Though there were some gains in Europe and Asia, issuance volumes in China declined to the lowest level in seven quarters. This occurred even with the lifting of pandemic restrictions and support from authorities.

The drop in Chinese issuance was attributed to rising US interest rates and issuers making sure they comply with new regulations before proceeding to market, according to Cheung. Alignment with international standards among Chinese issuers increased to 60% from 56.7% in the previous year.

Cheung said revised green bond principles and requirements for using proceeds, combined with growing discernment of international green bond investors, would drive the Chinese market toward closer alignment with international norms over the medium term. Parallel focus should be placed on post-issuance disclosure and reporting, allowing for more accurate and complete data collection, Cheung added.

Japan issuance

Green bond issuance in Japan fell 64.6% to $2.22 billion in the first quarter, according to the data.

While the Bank of Japan's December 2022 move to widen its target range for 10-year government debt yield enabled longer-term yields to rise, effective policy tightening slowed Japanese green bond issuance in the first quarter. Despite this, the country remained the second-biggest issuer in the region.

"The environment for [green bond] issuance is improving because expectations about the Bank of Japan's tightening waned," said Takahide Kiuchi, executive economist at Nomura Research Institute.

Stable interest rates may support issuance.

"Unless interest rates become volatile, green bonds [in Japan] could benefit from the current monetary policy stance," said Tamami Ohta, senior researcher at Daiwa Institute of Research.

Overall green bond issuance in Asia and Australia rose to $33.15 billion in the first quarter compared with $32.28 billion the previous year, mostly from $5.50 billion in green bonds issued by Saudi Arabia’s Public Investment Fund. Issuance also increased in India, rising 34.6% to $2.06 billion.