Channelling sustainable finance in APAC: overcoming fragmentation and navigating towards inclusion

A snapshot of the sustainable finance landscape in APAC

In spite of a slowdown in the APAC sustainable finance market in 2025, momentum remains strong in key pockets. Sovereign issuances are setting the tone for private sector participation and strong local currency markets are bolstering domestic growth, encouraging the participation of APAC’s growing ecosystem of boutique asset managers.   

Yet APAC’s pressing need to finance climate mitigation and adaptation is hindered by diverging taxonomies and limited third-party verification, obstacles that are particularly challenging for smaller investors.

Unlocking investment flows from all market participants will require coordinated action by APAC’s governments and standards setters to build a credible and navigable sustainable finance ecosystem. Regional harmonisation of standards and increased third-party verification are essential for accelerating the flow of sustainable finance to APAC at the scale and speed required to decarbonise the economy.

“Regional harmonisation of standards and increased third-party verification are essential for accelerating the flow of sustainable finance to APAC at the scale and speed required to decarbonise the economy.”

Rudi Lang, APAC Financial Services Industry Leader

Transition finance is pivotal to APAC

Transition finance is perhaps more important in APAC than anywhere else in the world due to its reliance on fossil fuels for energy security, with these representing the main form of energy generation at 70%.[1]. Unlike green, social or sustainable bonds, whose proceeds must be used exclusively for correspondingly green, social or sustainable projects (the latter being bonds whose proceeds are used for a combination of green and social projects), transition bonds channel finance to facilitate technological innovation and abatement of emissions in carbon intensive sectors. This presents a challenge because it necessitates nuanced, sector-driven approaches to decarbonisation, which is inherently difficult for investors to scale across a portfolio.

Growth in sovereign issuance will set the precedent for greater private issuance

Sovereign issuance goes beyond a mechanism for raising capital; it is an instrument for shaping private sector trends. Sovereign issuance is gaining traction with an increase in issuance value in 2024 of 71% to US$40 billion.[2] A noteworthy example comes from the Japanese government which issued US$17 billion in transition bonds, feeding into its Green Transformation Promotion Strategy.[3] This will likely set a precedent for crowding-in private finance in the years to come.

The strength of this market signalling is reinforced in APAC by the predominance of large, state-backed banks in the region. These banks are highly receptive to government signals and are likely to issue their own bonds following sovereign issuances, in turn improving liquidity and decreasing perceived risk to pave the way for private investors.

The importance of issuance in local currencies for market inclusion

90% of issuances in APAC were in local currencies in 2024,[4] bolstering domestic growth in sustainable bond markets. This is important for small and boutique asset managers, who do not benefit from the scale to hedge economically against foreign exchange risk and are thus often barred from participating in international sustainable bond markets. Indeed, with APAC countries such as Singapore and Hong Kong acting as growing hubs for boutique asset managers with specialised portfolios, this domestic expansion is crucial.

Diverging taxonomies are not fulfilling their objective to foster transparency and are hampering investor participation

Taxonomies are meant to cultivate transparency by delineating what constitutes a ‘green’, ‘social’ or ‘sustainable’ product, but in APAC fragmented approaches and definitions are undermining market confidence.   

Some regional taxonomies are principles based (Malaysia and the Philippines) while others draw on quantitative criteria,[5] and they have diverging classification systems for fossil fuel-based activities. For instance, the Indonesian Taxonomy has received widespread criticism for its acceptance of new coal projects as green under certain circumstances, contradicting internationally accepted climate science. IEEFA calls for stringent definitions of transition finance, including sunset clauses and technical screening criteria, characteristics not consistently present in APAC taxonomies.[6] This poses challenges for investors who, operating amongst ever tighter scrutiny on greenwashing, are hesitant to invest in products whose green credentials could be questioned.

High due diligence costs risk excluding smaller investors whose agility is critical to finance climate adaptation

The operational complexity of understanding multiple standards in different countries increases due diligence costs and compels the involvement of specialist sustainability teams, which not all investors have access to.

The dynamics of the APAC market are such that there is a high proportion of international banks, for which the time and cost of keeping abreast of cross-jurisdictional developments is less of a barrier due to their scale and access to specialist talent. Nevertheless, APAC’s financial ecosystem also hosts a growing proportion of boutique asset managers, particularly in hubs such as Singapore and Hong Kong, which are strategically important to ESG niches. These firms will struggle to engage in the required level of due diligence in a cost-effective manner. Therefore, it is essential that APAC countries move towards a regional sustainable finance ecosystem that incentivises participation from a broad spectrum of regional and local investors, such as small and medium-sized asset managers.

Furthermore, APAC’s exposure to physical climate hazards will necessitate increasingly innovative financial structures to channel capital to adaptation activities at scale in response to natural shocks. Due to their agility and higher risk tolerance compared to major international institutions, APAC’s boutique asset managers may be apt vehicles for such financial flows. Enabling their access to the sustainable finance market is therefore not just valuable – it is necessary.

Third-party verification is a critical tool for embedding credibility

In Asia, 75% of corporate sustainable bond issuances and almost all sovereign issuances were accompanied by a second-party opinion in 2024,[7] but assurance over use of proceeds and KPIs in loan frameworks lags behind, despite its position as a central enabler of improved transparency.

Third-party verification is essential for demystifying what is and isn’t classed as sustainable/transition activities, especially where those activities exist in a ‘grey area’.. Given the diverse capacity for climate mitigation in APAC countries, verification that transition activities are aligned with regional or sectoral decarbonisation pathways takes a significant burden off the investor.

Looking ahead, increasing third-party verification over use of proceeds and sustainability KPIs in loan frameworks will be an important foundation from which to build investor trust.

ISSB reporting can facilitate comparability, but only if adopted consistently

ISSB sustainability reporting is important for investors looking to mitigate risk by investing in credible sustainable products and being able to compare firms’ sustainability targets, actions and progress. Historically, disclosures on climate risk exposure, metrics and targets has been limited. The widespread adoption of ISSB reporting would expedite the comparison of targets and resilience plans across industrial and financial sectors, as well as determining whether firms’ business models, strategy and actions align with their sustainable bond framework commitments.

Additionally, from the reporting entity’s perspective, the introduction of ISSB allows for the production of investor-ready reports containing the business case for investment. Nonetheless, ISSB reporting will only serve this function for issuers and investors if it is adopted with a degree of uniformity across the region. This should represent a priority for current policy-makers who are embedding its provisions into national legislation. Currently, 14 countries in APAC have either formally announced the adoption of the ISSB standards or are actively engaging in consultations.[8]

Wrap-up: inclusion of diverse market participants is pivotal for mobilising sustainable finance at scale

The agility and higher risk tolerance of APAC’s boutique asset managers makes them important players in the mobilisation of transition finance. However, momentum generated by large sovereign issuances and strong domestic markets risks being offset by convoluted standards and concerns over credibility; barriers which disproportionately exclude smaller investors. Sustainable finance cannot be limited to the domain of those with large/specialist ESG due diligence teams.

Regional collaboration to establish interoperability between taxonomies and reporting standards, coupled with a push towards third-party verification, is vital for enabling investors of all sizes to make informed decisions. Only once the entire financial ecosystem is included can APAC channel sufficient financial flows towards sustainability goals. Given the acute climate adaptation challenges that the region faces, this is a strategic imperative.

[1] Asia-Pacific’s Different Pathways To Energy Transition; [2] Sustainability Insights: Sustainable Bond Outlook 2025: Asia-Pacific Issuance Could Hit Record High | S&P Global Ratings; [3] Sustainability Insights: Sustainable Bond Outlook 2025: Asia-Pacific Issuance Could Hit Record High | S&P Global Ratings; [4] Sustainability Insights: Sustainable Bond Outlook 2025: Asia-Pacific Issuance Could Hit Record High | S&P Global Ratings; [5] IEEFA_Sustainable Finance in Asia Taxonomies Oct2024.pdf; [6] IEEFA_Sustainable Finance in Asia Taxonomies Oct2024.pdf; [7] Asia Capital Markets Report 2025: Sustainable bonds | OECD; [8] https://www.ifrs.org/ifrs-sustainability-disclosure-standards-around-the-world/use-by-jurisdiction/