Promotion of green finance

Explanation

Green bonds

The bank and the French asset manager Amundi announced, in September 2019, the Asia Climate Bond Portfolio (USD 500 million) which is targeting corporate bonds in emerging markets. The framework of the portfolio takes into consideration three variables: climate mitigation, resilience and the share of green business. The portfolio will invest in both “labelled green bonds and unlabelled climate bonds”. The project’s stated objective is to address the “develop the climate bonds market” in Asia which is a laudable initiative, but it is too early to determine how the market will respond. Although the Bank has issued several climate bonds, they are yet to issue a certified green bond. It is notable, however, that the Bank issued its inaugural sustainable development bond in June 2020.

Greening the system

AIIB recently launched a Sustainable Capital Markets Initiative to build capacity among agents in the market and catalyse investment that aligns with strong environment, social and governance (ESG) standards.  This initiative is comprised of four pillars:

• The Credit Portfolio, discussed in the following paragraph, will demonstrate and encourage private sector financing.  Additionally, the Portfolio will allow the Bank and the Asset Manager to develop a relevant framework for investing in infrastructure;
• ESG Research will allow for varied and in-depth collaboration with research partners relevant to infrastructure investing and ESG investing;
• Transparency and Disclosure aims to work with market stakeholders to promote better transparency and disclosure in order to strengthen the impact of ESG ratings as an investment tool; and
• Capacity Building aims to contribute to learning and knowledge development in the market amongst key agents including corporates, rating agencies and securities regulators.

Alongside the Sustainable Capital Markets Initiative, a positive recent step taken by AIIB towards greening finance is the launch of the ESG Enhanced Credit Managed Portfolio, which intends to catalyse ESG investment strategies in emerging markets in Asia and build capacity amongst market participants. This portfolio will be comprised of corporate bonds, including quasi-sovereign bonds and green bonds where proceeds are directed to sustainable infrastructure. AIIB is also set to partner with an asset manager to build capacity around responsible investing by “producing research on ESG investing based on knowledge gained from applying AIIB’s ESG framework”.

The Bank’s 2020 Finance Report is built around the theme of “better” investments.  The Bank’s president says this means “upholding high environmental, social and governance (ESG) standards throughout the entire life cycle of the projects financed, planning for the future and reducing the likelihood of stranded assets” amongst other things.  The report calls attention to the danger of stranded assets due to climate risks (i.e. disasters such as flooding and coastal erosion) and the transition to a low-carbon economy (i.e. green policy, changing energy sources). With this and the alignment with Paris “temperature goals” (1.5°C and well below 2°C) in mind, the report states that any continued or new investment should carefully consider the risk/transition factors extensively (chapter 5). While making no specific commitments, the narrative heavily promoted green finance as smart finance.

Recommendation: AIIB should deliver on the aims of its Sustainable Capital Markets Initiative and encourage a shift from carbon-intensive, climate-vulnerable infrastructure toward low-carbon and resilient infrastructure.