Asian cities: preparing for a more sustainable future

The Age of Transformation in Asia is represented by a sharp rise in urbanisation. Cities in Asia are growing faster than any other areas in the world and its urban population is forecast to exceed 2.6 billion in 2030¹. This contrasts sharply with the developed world, where the impact of Covid-19 has vastly slowed the pace of urbanisation due to the prevalence of remote working and the reassessment of work/life balances.

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?

The population of Asia is nearing five billion people and currently represents almost 60% of the world’s population² . It’s urban centres are already some of the world’s densest and taking the projected human and economic impact from Asia’s growth trajectory into account, current available infrastructure will be insufficient to support these urban centres.

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

In support of this need for change, governments and financial markets are beginning to act. China, Japan and South Korea have led the region’s climate commitments and its central banks are placing increased importance on sustainability and ESG (environmental, social, and governance) investing.

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.

From an investment perspective, the need to make Asian cities more sustainable is secular rather than a passing trend. It is a long-term opportunity, marked by strong demand and continued growth. Infrastructure projects are generally capital intensive and usually require more than one round of cash injections. This aligns with the structure of fixed income, as bonds are typically issued in multiple rounds.

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.

The green ethos behind the development of sustainable Asian cities aligns with the rise of sustainable-labelled bonds.

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.

For Asian cities to become more resilient to the negative impact of climate change and environmental degradation, they will need sustainable infrastructure, improved transportation systems and air pollution control. Such a transformation can only happen with significant investment, both public and private. Asian green financing may be in its infancy, but early adopters of this new asset class have a compelling opportunity to capitalise on the vast potential it represents.

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.