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19 Aug 2020

Econ Digest

Green Bonds…A solution to environmental protection and sustainable business management

As the new generation has shifted to a boom in consumption of alternative products in which the carbon dioxide emissions of production processes are reduced in the long term, such as biodegradable plastics and meat substitutes from plants/laboratories, etc., this business model has begun to attract a lot of investor interest with the potential to raise hundreds of millions of dollars. In addition to having future profitability, this type of business is classified as a sustainable business and has a tendency to grow at a high rate in the long term.     


In the sustainable development of Thai businesses, the role of the government is to set business practices and educate the operators continuously. However, the adoption of sustainable business management is mostly seen in large and listed companies. The Securities and Exchange Commission of Thailand (SEC) has set out the sustainability assessment standards and encourages the disclosure of business sustainability information (in the three main areas of environmental, social and governance, known as ESG) in the companies’ annual reports. In addition, to promote investment in sustainability, the SEC has issued a measure to exempt fees for filing the applications for three types of bond offered for sale from May 2019 until May 2021, namely green bonds, social development bonds and sustainability bonds, which will become a factor in stimulating sustainable business operations through fundraising.        


Lately, businesses in Thailand have started issuing green bonds in line with the sustainable business models that meet the needs of investors shifting to a greater focus on environmental impact. Consideration of the yields on 3-year conventional bonds and 3-year green bonds with similar offering times reveals that compared to government bonds, in 2019 the yield spread of green bonds and conventional bonds with an A rating and 3-year maturity was 0.74% and 0.76% respectively, while in 2020 the yield spread of 3-year AAA(THA)-rated green bonds and conventional bonds is 1.67% and 1.78% respectively. It is worth noting that the yield spread between government bonds and 3-year green bonds offered to investors by companies is lower than the yield spread of between government bonds and conventional bonds with the same rating, resulting in lower financial costs for companies offering green bonds than conventional bonds. In practice, however, the yield that a company will offer to investors may be determined by many other related factors, including the operating performance, future investment plans, investor confidence, market conditions of each period, etc.


In addition, businesses have also adopted a clearer ESG-based sustainable management approach that will impact their corporate image, as evidenced by the continued growth in the number of listed companies in compliance with criteria of the SETTHSI index, or the SET Thailand Sustainability Investment index, since 2018. These listed companies operate businesses according to ESG principles and meet the liquidity criteria set by the Stock Exchange of Thailand including the number of securities and market capitalization, with businesses in energy, banking and finance, and telecommunication sectors, accounting for more than 50% of SETTHSI index-compliant listed companies. The growth in the number of listed companies meeting SETTHSI index criteria reflects the role that sustainable management factors play in the investment sentiment of corporate funding, and gives a signal to consumers about the stance of these companies on social and environmental responsibilities, which will lead to a change in business models, products and services in line with the funds’ objectives.


As Thailand ranked 78th in the world in the 2020 Environmental Performance Index (EPI), Thailand needs to improve environmental quality in many aspects that are still below average such as air quality, waste management, etc. Taking into account the factors supporting business adaptation, together with the current environmental situation, the impact of manufacturing on Thailand’s environment comes in the form of carbon dioxide emissions and dust problems, which are still mainly concentrated in agricultural, energy and transportation sectors. KResearch perceives that businesses engaging in agricultural products, food, energy, logistics, chemicals and plastics are the major players that have to step up their adjustment for long-term sustainability. If achieved, it will not only bring operational advantage in the long run, but will also have positive effects on the overall sustainability of the country, and should improve Thailand’s future EPI assessment.

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