Asian cities: preparing for a more sustainable future
While for many in Asia, the lure of cities means higher wages and greater employment prospects it can come at a cost: sub-standard housing, inadequate access to clean water, high crime rates and widespread pollution. The rising number of city dwellers is also stretching infrastructure and resources, creating an immense environmental and sustainability challenge.
The shift towards more sustainable living across Asian cities is something that must be addressed quickly, but could this also present an opportunity for investors?
Asia’s urbanisation has largely been driven by migration from rural areas to cities by people seeking a better quality of life and greater economic opportunities. But, while Asia’s growth prospects are clear, climate change and natural disasters have hit the region hard. Between 2014 and 2017, nations in this region were affected by 55 earthquakes, 217 storms and cyclones, and 236 cases of severe flooding, impacting 650 million people and causing the deaths of 33,000 people3.
While climate change is a global phenomenon, the toll in Asia has been particularly devastating as its high degree of dense urbanisation increases vulnerability when disaster strikes. This situation is expected to worsen if no action is taken: infrastructure must be upgraded not only to generate the economic efficiency needed to support these large populations but also to create the resilience needed to endure the physical impact of climate change. Sizeable investment – estimated to exceed USD 1 trillion4 – is required to achieve the necessary transition of Asian cities to ones that are more environmentally sustainable, focused on low carbon and inclusive
Yet, to make Asian cities more liveable will require a complete rethink of the way urban areas are developed and managed. The cleanliness of air, water and land need to be pushed to the forefront and ideas about public space need to encompass all residents – including families, children, the elderly and the poor.
Such a transformation needs to focus on five central themes:
- Enhancing urban mobility within and across cities, incorporating low-carbon elements where possible and improving mass transit systems.
- Improving the basic infrastructure of cities, as well as improving their resilience to extreme weather events.
- Promoting integrated development to balance a mix of social, economic, nature-based activities.
- Building health and education facilities to increase the provision of, and improve access to, healthcare and education.
- Supporting innovative and technological solutions for the sustainable development of cities that would include the use of smart grids, smart metering, smart signalling, smart lighting and e-road pricing.
Melaka in Malaysia is an example of such a transformation. Here historic neighbourhoods have been developed to ensure less need for automobiles; the river has been transformed from a polluted drainage system to a tourist attraction and the city is also developing its renewable energy capabilities to improve the air quality5.
That said, Asian credit has endured a fierce sell-off since mid-2021 sparked by concerns around the Chinese property sector. While these concerns were valid at that time, Chinese authorities have subsequently sought to quell investor fears and have shifted to a far more dovish policy tone. In addition, the wider Asian credit market was needlessly caught up in the sell-off, meaning Asian bonds are now far more attractive from a valuation perspective. They also present a compelling option in comparison to other fixed income assets, which are expected to remain caught up in concerns around the repercussions of the US Federal Reserve’s policy tightening cycle.
There has already been a proliferation in ‘green financing’ in Asia, particularly in the form of sustainable-labelled or GSS bonds that represent green social and sustainable themes, as well as sustainability-linked bonds – total issuance of such bonds in Asia jumped from USD 37 billion in 2020 to USD 99 billion in 20216. And this is expected to increase on the back of rising investor demand and from regulators increasingly pushing more companies to disclose the ESG impacts of their businesses.
What makes GSS bonds particularly attractive over the long term is the associated green premium or ‘greenium’ that investors can earn from holding GSS bonds, which tend to be marked at a higher price compared to conventional bonds by the same issuer, as has been observed in more mature GSS bond markets such as Europe. The greenium development is still in the initial stages in Asia and is expected to mature over time with demand outpacing supply as green bond investing becomes the norm, which should particularly benefit early investors.
At BNP Paribas Asset Management, our new Sustainable Asian Cities strategy has been designed to help tackle the unique challenges facing Asian cities as they continue to grow and deal with climate change. As well as investing in sustainable-labelled bonds, alongside conventional bonds from issuers who earn at least 20% of their revenues from the theme, the strategy also showcases our strong sustainability credentials.
This new strategy not only enables investors to gain access to a new, powerful theme that resonates with ESG priorities, but that also taps into the emerging greenium of GSS-labelled bonds in Asia.