ABF now includes green bonds

Published November 8, 2021, 5:14 PM

by Lee C. Chipongian

Central banks in the region including the Bangko Sentral ng Pilipinas (BSP) have agreed to include green bonds in the Asian Bond Fund (ABF) after adjusting rules of the index.


The 11-member Executives’ Meeting of East Asia Pacific (EMEAP) Central Banks in a joint statement Monday, Nov. 8, said the IHS Markit — the index administrator of the iBoxx ABF Index — has completed the review of the rules of the bond fund exchange and trading and they will now adjust the index, such as the setting of a lower minimum outstanding notional threshold for sub-sovereign green bonds issued in different markets.

From the current five bonds per issuer, the sub-sovereign issuer limit is now 10 percent per issuer in each single market index, according to the EMEAP statement.

In addition, bonds will be labeled as green bonds by the Climate Bonds Initiative or “bonds that are self-labelled and externally-reviewed as green” should be in alignment with the Green Bond Principles of the International Capital Market Association.

EMEAP said it “believes this initiative will help catalyze further deepening of local currency-denominated bond markets, in particular green bond markets in the region.”

“The EMEAP will continue to explore ways to further contribute to the development of the local currency denominated bond market,” it added.

The new rules will take effect from the index rebalance date of March 31, 2022, on which date all new bonds will be added and the new thresholds for sub-sovereign green bonds become effective, according to the statement.

“The sub-sovereign bonds that become eligible for index inclusion on March 31, 2022 will be included through monthly rebalancing over six months, each with equal weight, in order to facilitate a smooth transition,” it added.

Besides BSP, EMEAP includes Reserve Bank of Australia, People’s Bank of China, Hong Kong Monetary Authority, Bank Indonesia, Bank of Japan, Bank of Korea, Bank Negara Malaysia, Reserve Bank of New Zealand, Monetary Authority of Singapore, and Bank of Thailand.

The BSP has so far invested $350 million in the Green Bond Fund, part of the country’s $107 billion gross international reserves. The BSP also reinvests $250 million to $300 million in the ABF. The Bank for International Settlements (BIS) is the administrator of both the Green Bond Fund and ABF.

The ABF, revised in 2005, was first established in 2003 as a response to the 1997 Asian Financial Crisis. It is managed by the private sector with the BIS as administrator. The current ABF includes the Pan-Asia Bond Index Fund (PAIF) and eight single-market funds, and tracks the iBoxx ABF Index.

In 2018, the EMEAP started investing in local currency bonds in the ABF and PAIF to improve liquidity in the region. The current ABF, also called ABF2, is the local currency bonds while ABF1 is the foreign currency bonds.

ABF1 was closed in 2016 and reinvested to ABF2 which is the PAIF and the eight single-market funds. It invests in local currency-denominated government and quasi-government bonds in EMEAP economies other than Australia, Japan and New Zealand.