The 2015 Paris agreement marked a pivotal shift towards embedding sustainability within the global financial system. Since then, sustainable finance has evolved from a trend to a critical focus area for economies striving to meet their climate transition goals. Despite challenges like weak economic growth and geopolitical instability, the importance of sustainable finance has only grown, solidifying finance’s role as a key tool in the fight against climate change. This is particularly evident in China, where the pursuit of “new quality productive forces” is driving the country's green economic ambitions, fostering innovation and rebalancing the economy.

China’s commitment to green economy

Even amid current economic headwinds, China’s dedication to building a greener economy remains unwavering. The government has set ambitious targets to achieve peak emissions by 2030 and carbon neutrality by 2060. As part of this effort, China aims to reduce nationwide energy consumption and carbon dioxide emissions per unit of GDP by 2.5% and 3.9% respectively in 2024.

This commitment is reflected in a sustained policy drive to support the net-zero carbon transition, a strategic shift towards domestic currency bond issuances and the development of transition finance taxonomies. Additionally, there is a growing recognition within China’s corporate sector that green transformation is not just a compliance necessity, but a strategic investment in the future. The perception of green initiatives as costly burdens on the balance sheet is rapidly fading.

Over the past decade, finance has been a catalyst for the rapid development of green industries in China. Today, Chinese companies in the renewable energy sector, including manufacturers of solar panels, wind turbines and electric vehicle batteries, have emerged as global leaders. They play a crucial role in the global net-zero transition, scaling up to meet the increasing demand for renewable energy solutions. As the world continues to expand its renewable energy capacity, substantial financing will be required to scale operations and increase supply – further fuelling the demand for sustainable finance.

Rebound in green, social and sustainability ( GSS ) bond issuance

While the syndicated loan market in the Asia-Pacific ( excluding Japan ) region contracted sharply by 33.9% to US$218.3 billion, due to challenging market conditions, including high interest rates and geopolitical tensions, sustainability-linked loans have demonstrated remarkable resilience and growth, with volumes nearly doubling year-on-year to US$25.7 billion. At the same time, the market is also seeing more diversified use of green and sustainable bond proceeds, ranging from renewable energy, green buildings, as well as education and healthcare, directly addressing the Asia-Pacific region’s growth and development needs.

In Asia, China continues to drive the sector's growth, remaining the largest source of green bonds in the first half of 2024. The rise of green industrial policies and increasing regulatory pressures on firms to reduce carbon emissions, especially in hard-to-abate or carbon-intensive sectors like energy and manufacturing, are fuelling green investments and sustainable bond issuances. Transition finance is also playing a supporting role in accelerating this trend.

Sovereign issuance leading the way

Sovereign issuance of GSS bonds is also on the rise across the Asia-Pacific region, stimulating local sustainable bond markets by setting long-term pricing benchmarks, boosting liquidity and serving as models for private issuers. Building on the momentum from 2023, this year has seen the Hong Kong Government become the largest source of climate-aligned government bonds in Asia and the fifth-largest cumulative issuer of government green bonds globally.

Other Asian markets are also implementing sustainable finance strategies tailored to their unique economic contexts, utilizing green bonds, loans and sustainability-linked loans to effectively facilitate their net-zero carbon transition. The Japanese government issued its first tranche of climate transition bonds earlier this year to finance the development of clean energy resources, and together with Japanese companies, it aims to make investments worth 150 trillion yen ( US$1 trillion ) in green energy projects over the next decade. In Singapore, the Government issued another round of sovereign green bonds in May this year, the third since the debut issuance in 2022, to spearhead efforts to decarbonize and enable sustainable economic growth.

Road ahead

As governments and corporates across Asia ramp up the issuance of labelled bonds to finance their climate and sustainability goals, the demand for sustainable finance solutions is expected to maintain its upward trajectory. Issuance volumes will likely be supported by ongoing climate finance needs, investments in emerging green technologies, and continued market innovation. Moreover, a stabilizing macroeconomic environment and anticipated rate cuts by the Federal Reserve could further boost GSS issuance before the end of the year.

James Poon is the country manager for mainland China and Hong Kong at ING.