Climate bonds indexed to a basket of currencies could help fund Asia’s green transition, according to the Asia Pacific Economic Cooperation's (APEC) Business Advisory Council (ABAC).

The group is also suggesting a voluntary carbon market program for the Asia-Pacific region. 

Could these financial tools help push Asia’s fossil fuel reliant economy towards a green transition? 

Classifying climate bonds  

The group identifies funding for the green transition as one of its biggest obstacles which bonds could help tackle. 

Masatsugu Asakawa, the president of the Asian Development Bank, recently highlighted that the cost of the clean energy transition in the region is “at least $1 trillion annually up to 2030.”  

However, it is essential to consider the type and structure of bonds in order to successfully apply them to reach sustainability goals.

There are green bonds and, the more recently embraced, sustainability-linked bonds (SLBs). 

Green bonds are more restrictive about the projects that they can be used to finance. They are usually issued with specific environmental projects in mind. 

SLBs are less restrictive, which allows for more participants, but also far less ambitious. These types of bonds have incentives for to achieve sustainability targets and penalties when these aren’t met.  

SLBs are one of “Wall Street’s favorite financial innovations for helping reduce corporate greenhouse gas emissions.” 

However, a study conducted by the Climate Bonds Initiative, showed that they were vastly underperforming when it came to sustainability targets.  

Over 80% of 768 SLBs issued from 2018 through November of 2023 were not aligned with climate goals, such as the Paris Agreement. This was due to legal loopholes and structural problems with their design and execution.

Given the popularity of SLBs, more clarification from ABAC is needed to judge how effective climate bonds could be for the Asia-Pacific green transition.  

Carbon credits also face controversy 

Hiroshi Nakaso, the head of ABAC’s finance and investment task force, said that “what we’re trying to establish is an interoperable, or mutually tradeable, voluntary carbon credit network within the Asia-Pacific region that can accelerate the region’s transition to a low-carbon society.” 

The effectiveness of carbon credits, tradeable permits allowing a certain amount of emissions, has been subject to heavy controversy and criticism from environmental groups in the past.

Most recently, the Science Based Targets initiative, a global regulator of private sector CO2 targets, conducted a study that indicated that “various types of carbon credits are ineffective in delivering their intended mitigation outcomes.” 

Carbon credits are a huge industry, which would grow even further if a credit network were established in the Asia-Pacific region.    

ABAC will present its full set of recommendations at the upcoming APEC leaders’ summit in Lima, Peru in November.