Environmental, social and governance loans see a smaller decrease, with funds raised dipping 7.6% to US$7.7 billion
[SINGAPORE] Proceeds raised from environmental, social and governance (ESG) bonds in South-east Asia fell sharply in the second quarter of 2025, extending its year on year decline for the second straight quarter.
ESG bond proceeds fell 74.8 per cent to US$1.6 billion in the three months to June 2025, compared with US$6.2 billion in the same period a year earlier, according to financial data provided by LSEG.
ESG loans performed better, with funds raised dropping 7.6 per cent to US$7.7 billion from US$8.4 billion over the same period.
Sustainable finance analysts said uncertainty and volatility in Q2 – largely triggered by wide-ranging US tariffs – have slowed the issuance of labelled debt by corporates in the region.
ESG bonds
The decline in ESG bond proceeds in South-east Asia is something of an outlier.
Funds raised from labelled bonds actually rose 18.4 per cent, to US$221.6 billion, across the globe. In Asia-Pacific excluding Japan, the amount shot up 63 per cent to US$65 billion.
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A number of issuers in South-east Asia – typically led by sovereign and supranational agencies raising substantial US-dollar-denominated transactions – have delayed their funding plans given the volatility experienced in Q2, said Sean Henderson, co-head of Asia-Pacific debt capital markets at HSBC.
However, he noted that these issuers are now returning to the market. For example, the Indonesian government on Jul 17 issued a US$1.1 billion green bond.
Within South-east Asia, sustainability bonds saw a higher number of issuances at US$1.2 billion, far exceeding green bonds which typically has been the most popular ESG-labelled bonds.
While green bonds are used to fund projects that have positive environmental impacts, sustainability bonds mix both green and social objectives.
Henderson said that as socio-economic development is a key priority in the region alongside reduction in environmental impact, issuers are seeking to use labelled bonds that best reflect their holistic approach to driving improvements in sustainability outcomes rather than just environmental improvements.
“While green projects continue to make up the majority of capital expenditure for sustainability funds, highlighting the social angle supports a broader understanding of how the issuer is engaging and supporting enhancing socio-economic outcomes that might have otherwise been overlooked,” he added.
Looking ahead, Henderson said that the market is pricing in a number of interest rate cuts, and so issuers have been adapting their funding plans to reflect this, which could lead to higher issuance volumes in 2025.
On a year-to-date basis, ESG bond issuances over the first half of 2025 were just 10 per cent lower than in the same period a year earlier.
“The decision to issue in labelled format or not is largely independent of tariffs and more down to issuer and sector-specific considerations, but we do expect a commensurate pickup in ESG issuance due to the broader supportive market conditions for bonds,” Henderson added.
An interesting impact of tariffs has been lower interest rates in many Asian currencies, he noted. “This has driven strong interest from global issuers to tap the Asian local currency bond markets.”
The top bookrunners for ESG bond deals in South-east Asia over H1 2025 were HSBC (US$1.1 billion), UBS (US$642.5 million) and Morgan Stanley (US$432.7 million).
ESG loans
Similar to their labelled bond counterparts, ESG loan issuances in South-east Asia in Q2 2025 ran counter to the global and wider Asia-Pacific trend, where volumes continued to rise.
Across the globe, ESG loans across the globe went up 15.2 per cent to US$222.4 billion; in Asia-Pacific excluding Japan, the figure rose 30.2 per cent to US$34.7 billion.
Jeong Yoonmee, head of the sustainability office for global wholesale banking at OCBC, said that while tariffs on clean energy exporters in South-east Asia may have added some uncertainty, their direct impact on ESG loans is limited, because energy traders are not major contributors to ESG loan volumes.
She added that the slight dip in ESG loan issuances in South-east Asia reflects near-term headwinds rather than a fundamental shift.
While some borrowers are taking a more measured approach amid evolving standards and market scrutiny on credible transition, the underlying momentum for sustainable finance in the region is strong.
“This remains a long-term journey with potential for momentum to pick up over time as the ESG landscape in South-east Asia matures,” said Jeong.
Echoing similar sentiments, Shilpa Gulrajani, head of sustainable finance for DBS’ institutional banking group, said that South-east Asia continues to be a key player in the global energy transition, with continued demand for renewable power, greener infrastructure and more resilient supply chains.
Green loans remained the dominant instrument in sustainable financing in the first half of this year, driven by a strong focus on strengthening energy security and accelerating green technology adoption, she added.
While the tariffs may create uncertainty, Jeong said that they are unlikely to derail energy transition initiatives in South-east Asia in the long term.
There is support on the policy front, with governments and businesses increasingly recognising that investing in green and social projects is essential for long-term resilience and market competitiveness.
The commercial viability of renewable energy technologies also continues to improve with falling costs, innovation and growing investor demand.
With the US Federal Reserve recently cutting rates by 25 basis points – the first time it has done so this year – and with one more pencilled in later in the year, ESG loans are expected to become more accessible with reduced borrowing costs, which will lend further support to the long-term appetite for ESG investments, said Jeong.
Gulrajani said she expects more activity ahead as clearer views on tariffs start to form and players bring back deals that were previously put on hold.
“Domestic energy security and supply chain resilience will continue to play a pivotal role in driving sustainable financing. Demand for credible transition plans is also increasing, further improving investor confidence,” she added.
OCBC was the top arranger for ESG loans in South-east Asia in H1 2025, with US$1.8 billion raised. DBS came in second at US$1.6 billion. Sumitomo Mitsui Banking Corporation (SMBC) was third, with US$1.4 billion raised.