Sustainable bond issuance nears $1trn but avoided CO2 drops

Steady growth in the green, social, sustainability, and sustainability-linked bond (GSSSB) market could see assets surpass the $1trn mark in 2024, however levels of avoided carbon from the products were down in 2023 compared to the previous year.

According to the S&P Global Ratings report Sustainability Insights | Research: Sustainable Bond Issuance To Approach $1 Trillion In 2024, GSSSB issuance is set to increase modestly – to somewhere between $0.95trn and $1.05trn. In 2023 total GSSSB issuance was $0.98trn.

The slight rise this year is expected to be driven by green bond issuance in response to increased demand for environmental projects globally, increased adoption of sustainable taxonomies and transparency initiatives and growth in issuance from emerging markets.

A separate report from MainStreet Partners, GSS Bonds Market Trend, Q4 2023, noted a 13% decline in the number of debut issuers of GSSSBs from 594 in 2022 to 517 in 2023 and stated this suggests while there are fewer new entrants, those who have previously issued GSSSBs are now issuing more of them and at higher financial volumes.

Inflation bites

MainStreet Partners’ report also showed progress in other areas of the GSSSB market such as alignment to the EU taxonomy increasing from 33% in the fourth quarter of 2021 to 45% in the same quarter of 2023.

It stated major drivers behind the rise in taxonomy alignment are more real estate activities being classed as green – in Q4 2023 this contributed to funds’ taxonomy alignment almost as much as renewable energy.

However, MainStreet Partners stated there has been a decline in the average CO2 avoided per €1m invested. A sample of five green bond funds were analysed – their average impact dropped from 560 tCO2e/€1m avoided in 2022 to 503 tCO2e/€1m avoided last year.

This fall in avoided emissions, MainStreet Partners said, could be due to inflation raising project costs and more GSSSB issuances by sovereigns compared to corporates – the latter achievingnotoriously lower impact results.

Meanwhile, a third paper from Nordic financial services group, SEB, explained why issuance of green bonds was not higher last year. It called 2023 a “missed opportunity for energy transition” citing an inflation and interest rate shock which caused costs of new clean energy installations to increase temporarily. China, SEB stated, had more or less completed the shift to an investment level consistent with an accelerated transition and in Europe political support for clean energy investment wavered after the initial shock of the energy crisis faded.

Global spread

Europe – where 20% of all bonds are now GSSSBs – is the region issuing the higher number of GSSSBs with 66% of the global total in 2023. While the Americas accounted for 16% and Asia 14%, Mainstreet Partners’ report showed.

The group also noted France is the largest cumulative GSSSB issuer, and allocates the most GSSSBs to social projects. And across the Atlantic, the United States benefits from the highest allocation of GSSSB financing for green projects.

Looking at the global picture, green bonds remain the preferred label by issuers with a 56% share, followed by sustainability bonds at 19% and social bonds with 16%.

2024’s flying start

Last month was a “record-breaking period for new sustainable debt transactions”, according to SEB. It noted total issuance rose 14% from January 2023 and stated this hints at a potential turnaround this year despite tensions in the Middle East flaring up, elections scheduled in 50 countries including the US and the EU, rate cuts pushed back to the second half of the year and worsening macroeconomic signals are in key sustainable finance markets in Europe.

“Amid this rather uncertain background, the sustainable finance market staged a surprise in January. With $147bn in new sustainable bonds and loans, last month saw the highest cumulative transaction in sustainable finance in January ever,” the SEB paper stated.

The group commented green bonds experienced a particular boost with a 25% year-on-year increase to $76bn in new issuance in January, while sustainability and social bonds were up 16% compared to the first month of 2023 – at $36bn and $30bn in new issuance respectively.

Further ahead

S&P Global Ratings said as we get further into 2024 it expects we will see a greater diversity in bond types, with transition bonds set to have their strongest year on record and blue bonds expected to gain traction. According to the group, issuers in middle- and low-income countries will strive to increase their share of GSSSB issuance in 2024 given their large, unmet funding needs.

Pietro Sette, research director at MainStreet Partners, said: “Our latest report heavily suggests that the GSSSB market is reaching a maturation phase, with a higher rate of issuance from entities that have previously used GSSSBs as part of their fixed income portfolio. This indicates GSSSBs becoming a mainstream component of investor portfolios, both in retail and institutional.

“Thanks to reported post-issuance data, bonds aren’t associated with just the risk from the issuer’s country anymore, but we can now pair that information with the risk spurred by the location of the projects financed. This is an exciting development, allowing investors using our tools to go ‘beyond the label’ and better quantify the positive impact of their allocation.”