1. Introduction
China’s property downturn is impacting yet another segment of financial markets: ESG-labeled securitized debt. This article explores the factors behind the decline and the broader implications for ESG finance.
2. Impact of China’s Property Downturn on ESG Finance
Chinese developers are issuing far fewer securities tied to climate or social objectives, leading to only $2.8 billion being raised in Asia Pacific in the first half of the year. This marks an 86% drop from the previous year, contrasting with increases in the US and the EMEA regions.
3. Decline in ESG-Labeled Securitized Debt
“This is definitely a bit of a setback,” said Trevor Allen, head of sustainability research at BNP Paribas SA, noting the significant issuance in Asia in 2022 and 2023. As the housing market has cooled in China, there have been fewer loans to roll up into green securitizations.
4. Major Issuers Affected
Commercial and housing property sales continue to slump in China as consumers cut spending. Greater scrutiny of ESG labeling may also be playing a part, although the niche market remains largely unregulated in Asia, unlike in the EU.
Special purpose entities of developers like China Jinmao Holdings Group Ltd., Shui On Land Ltd., and electric vehicle maker BYD Co. were among China’s top issuers in 2023. However, they have either slowed down or are absent this year.
5. Challenges in the ESG Market
Korea Housing Finance Corp., a major issuer of securitized debt aimed at affordable housing, has also been absent in 2024. Additionally, there have been no sales by Chinese developers of commercial mortgage-backed securities with an ESG label in 2024, compared to $4.3 billion over the past two years.
Chinese developers typically use funding for energy-efficient buildings, although doubts have been raised about whether these projects are genuinely climate-friendly. “Demand is still very strong from the investor side,” said Claire Coustar, Deutsche Bank AG’s global head of ESG for fixed-income and currencies, “but coming up with enough green-eligible mortgages has been a challenge.”
6. The Role of Electric Vehicle Producers
With property developers on the sidelines, China’s EV producers have been the main backers of issuance in Asia this year. Shengshi Rongdi Auto Loan ABS and Chang Ying Auto Loan ABS raised a combined $2.2 billion, with BYD and Great Wall Motor Co. entities as originators.
7. Conclusion
Securitizations, which pool assets like home or auto loans into interest-bearing securities, remain complex and opaque. ESG investors face a lack of standardized definitions and limited data on underlying loans. As China’s property market struggles, the future of ESG-labeled securitized debt remains uncertain, with electric vehicle producers stepping in to fill the gap.
