Moody’s latest sustainable finance quarterly update says that global sustainable bond issuance has the potential to eclipse the initial 2023 forecast of $950 billion, despite challenging markets. It also points out that sustainable bonds now represent 15% of the global bond market.
- Global issuance of green, social, sustainability and sustainability-linked bonds (GSSS) totalled $258 billion in Q2, flat versus the same period last year and a modest 4% decline from Q1 2023, and reached 15% of the global bond market.
- Across the four segments, there were $156 billion in green bonds, $51 billion in social bonds, $40 billion in sustainability bonds and $11 billion in sustainability-linked bonds (SLBs).
- Total sustainable bond issuance hit $526 billion in the first half of the year, up 7% from the same period in 2022 despite a decline in overall bond issuance. This shows resilience in sustainable finance, as companies with strong sustainability approaches are showing greater adaptability to market pressures.
“We expect fairly robust GSSS bond volumes in the second half of the year, with the potential for issuance to eclipse our $950 billion forecast for all of 2023,” said Matt Kuchtyak, VP-Sustainable Finance at Moody’s Investors Service.
“However, growth in the second half of the year could be tempered by a drop in the number of first-time sustainable bond issuers, declining issuance in some markets such as the US, and the potential for higher borrowing costs and tighter lending to curtail global macroeconomic growth.”
Macro-economic conditions are affecting the bond market
There is a clear decline in the number of debut issuers, which poses a potential constraint on market growth. Although this decline should be expected as the market matures, the drop has become more evident over the past year.
While some of it may be attributable to market conditions, Moodys’ analysis suggests that other more secular factors could be holding back would-be debut issuers, including heightened scrutiny of potential greenwashing and an increasingly complex ESG regulatory and political landscape.
Market dynamics differ by region
In Europe, sustainable bonds have accounted for around 20% of total bond issuance over the past two years. This reflects the stronger regulatory environment within Europe and the focus on greening finance, industry and the overall economy.
The US market is more challenging. While there has been a significant movement against finance taking ESG concerns into consideration by Republicans at a State level, the battlefield has now reached the federal level. Republicans on the House Financial Committee presented four bills intended for: “restricting politically motivated, non-material disclosure mandates, reforming the proxy voting and shareholder proposal processes, increasing transparency for federal banking regulators, and limiting the Securities and Exchange Commission’s (SEC) authority to regulate shareholder proposals.”
This battle continues despite obvious concerns about heat waves, crop failures, water scarcity and even increasing divisions over insurance provision in areas of climate risk. While climate risk reporting and action is a requirement in many parts of the world that is not yet the case in the US, and even the guidelines from the SEC have been delayed a number of times. Unsurprisingly, therefore, sustainable bonds still account for a much smaller share of total issuance in North America, dropping to 4.2% in the first half of 2023 from 5.5% for all of 2022.
Meanwhile, sustainable bond shares in the Middle East and Africa and Latin America and the Caribbean moved higher in the first half of 2023, with the Middle East and Africa, in particular, increasing to 29% in the first half of the year from just 12% across all of 2022.
Given the experiences that these regions have had recently, combined with the need to build local resilience, it is hardly surprising that the appetite for sustainable debt is on the rise. While the level of risk within traditional benchmarks may not have filtered through to the mindset of investors everywhere, there is a clear recognition of the challenge in parts of the world.
Growing focus on the importance of sustainability in the capital markets
The International Capital Markets Association (ICMA) discussed GSSS bond principles at its annual meeting in June 2023, and its growing focus reflects the continued evolution of the sustainable bond market. ICMA released updates to its Sustainability-Linked Bond Principles and Social Bond Principles, as well as modifications to other supporting documents.
It also revised its Climate Transition Finance Handbook as part of the wider effort to harmonise decarbonisation standards. Moody’s said: “ICMA’s first update of its Climate Transition Finance Handbook since its initial publication in 2020 represents further recognition of the importance of transition financing. Issuers in carbon-intensive industries are increasingly tapping the sustainable debt market to finance their net-zero ambitions and transform their business strategies to adapt to growing policy and market risks. In the first half of 2023, issuers in carbon-intensive sectors brought $61 billion of sustainable bonds to market, equivalent to 12% of total sustainable bond issuance.”
Sustainable finance is going from strength to strength globally, but its acceleration remains dependent on domestic policymakers’ appetite for strong action on sustainability and climate concerns. While there is a growing body of evidence that economic models of climate impact have not sufficiently factored climate science into their planning, and that they are therefore aggressively underestimating the wider costs, there are still many who refuse to recognise the depth and breadth of the risk.
Recent heatwaves, floods and droughts are being described not as the ‘new normal’ but as the start of an increasingly volatile environment. Resilience is going to become critical and finance that doesn’t take this into consideration will be facing significant questions.