Kosintr Puongsophol, Shu Tian and Benita Ainabe (Asian Development Bank)
Cambodia’s capital market has developed fast in recent years, presenting participants and regulators with an important question: How can they harness the market’s power to promote environmental protection and socioeconomic development?
One way to accomplish this is through financial instruments that take environmental, social and governance (ESG) objectives into consideration — such as green, social and sustainability (GSS) bonds. Proceeds from these innovative debt securities are used to finance or refinance projects with positive environmental or social outcomes.
Channeling savings into such investments can contribute to a green and resilient future for Cambodia, helping achieve the 2022 priorities of the Association of Southeast Asian Nations (ASEAN), which is currently under Cambodia’s chairmanship. It can boost the country’s resilience to climate change and strengthen micro, small, and medium-sized enterprises (MSMEs), supporting women’s entrepreneurship in particular.
A key challenge to making this happen is that despite recent progress, Cambodia’s corporate bond market is still at a nascent stage. On the demand side, it lacks a sound and diversified base of domestic institutional investors. Although commercial banks have become major investors in this market, pension funds and insurance companies continue to keep cash in bank accounts.
Pension funds and insurance companies are typical long-term bond market investors, but the majority of pension and insurance premium receipts in Cambodia are in US dollars—making it more difficult for the country to develop a local currency bond market.
On the supply side, bond issuers have been enticed solely through the government’s tax incentive program. The current tax incentives will expire in January 2022, clouding the outlook for corporate bond issuance.
To mobilize private capital for sustainable investments, it is critical to tackle these issues and continue developing the market’s overall capacity. At the same time, however, policy makers can act to ensure the market develops in a direction that is supportive of ESG-aligned investments. The following recommendations should be considered:
First, regulators should make it clear that financial institutions and securities issuers are expected to incorporate ESG considerations into their lending practices and business operations.
The National Bank of Cambodia’s membership in the Network of Central Banks and Supervisors for Greening the Financial System, as well as the Securities and Exchange Regulator of Cambodia’s (SERC) efforts to promote GSS bonds, are positive examples.
As chair of the ASEAN Capital Markets Forum, a grouping of ASEAN securities regulators, SERC should also ensure that local GSS bond market development is consistent with regional initiatives, such as the ASEAN Taxonomy for Sustainable Finance.
Second, the Non-Banking Financial Services Authority should encourage institutional investors, particularly pension funds and insurance companies, to prioritize investments in GSS bonds. It should also encourage the mobilization of savings and private capital from a broader local investor base.
One way is to introduce new GSS-themed investment vehicles like mutual funds and other collective investment schemes that would help retail investors access the bond market, ideally in local currency via professional asset managers. As a result, retail investors with limited savings would be able to invest in corporate bonds, including GSS bonds. This would increase demand while also enhancing liquidity and transparency in the market.
Third, securities issuers, particularly their boards of directors and senior management teams, should recognize how their business operations can help address ESG issues. They should also be aware of the potential costs and risks associated with negative environmental and social impacts of their operations.
For instance, a company could install more energy-efficient lighting in its office buildings, or it could prioritize local job creation, allowing workers to remain close to their families. Put together, the actions of individual businesses, including MSMEs, can have a significant impact. Banks can contribute by issuing GSS bonds to finance loans that MSMEs can use for ESG-aligned investments.
Fourth, capital market intermediaries in Cambodia need more training on GSS bonds from regulators, securities exchanges, and development partners. While these intermediaries may understand the bond market, they often lack experience with the principles and standards governing GSS bonds.
It is also critical to incorporate sustainability into refresher courses for licensed intermediaries, as well as financial literacy classes for the general public. With better capacity to support issuance and external review, these intermediaries can contribute to a better functioning GSS bond market.
With the right policies and strong support from stakeholders and development partners, regulators and participants can use the capital market to help achieve positive environmental and social outcomes, even for Cambodians who do not participate directly in the market.
Kosintr Puongsophol is a financial sector specialist at the Economic Research and Regional Cooperation Department (ERCD) of the Asian Development Bank. Shu tian is an economist at the ERCD, ADB. Benita Ainabe is a senior financial sector specialist at Southeast Asia department of the ADB.