S&P Global Ratings is forecasting a rise in the issuance of green, social, sustainable, and sustainability-linked (GSSS) bonds in 2023, but believes sustainability-linked bonds (SLBs) are at a turning point, after their issuance declined in 2022.
- S&P expects GSSS bond issuance to rise 5-17% in 2023, but cautions that SLB volumes are at an inflexion point largely due to a credibility gap in issuers’ sustainability goals.
- Investors are becoming more sceptical about the asset class’s reliability in achieving meaningful sustainability goals, which is also weighing on the minds of issuers.
- Resolving investor doubts will be critical to restoring growth in what was once the fastest-growing GSSS segment, also deemed critical to transition finance.
In a new report, S&P Global Ratings provided its forecast for GSSS bond issuance in 2023. It also looked at factors that will influence the global issuance of sustainable debt, including a drill-down into sectors and regions.
GSSS bond issuance on the rise
S&P forecast total GSSS bond issuance of between $900 billion and $1 trillion in 2023, up 5-17% over 2022 issuance of $853.5 billion. Few people would have discounted S&P’s $1.5 trillion forecast for 2022 GSSS bond issuance, after exceeding the $1 trillion mark in 2021, but by September 2022 this had been cut by 42% to $865 billion.
Even though GSSS issuance declined in 2022 compared to the prior year, it still outpaced the broader bond market and accounted for a larger share of total bond issuance. Green bonds accounted for 55% of GSSS volume in 2022, while SLBs declined to 8%, after reaching a high of 12% in the first quarter, and finishing at 9% of the total in 2021.
Why are SLBs at an inflexion point?
After a 21% increase in issuance in the first half of 2022, SLB’s volumes declined substantially by year-end, finishing the year 25% below 2021 levels. This was due to increased scepticism about the credibility of the sustainability targets established by the asset class, as well as issuers being concerned about greenwash claims.
To restore SLBs to their former trajectory, issuers will need to identify solutions to resolve concerns about the credibility of the related key performance indicators (KPIs), which in turn may also invite scrutiny of their sustainability targets.
A good example of this is advocacy group Mighty Earth complaining to the US Securities and Exchange Commission against meat producer JBS’ (BVMF:JBSS3) green bonds. The complaint accuses JBS of greenwash after it issued four SLBs, even though the key performance indicators tied to its emissions reduction did not include its Scope 3 emissions, which account for 97% of its footprint.
As SLB proceeds are eligible for general corporate purposes, the use of proceeds is not confined to a specific green project with clearly identified sustainable objectives. Explaining the credibility of their sustainability or transition strategy, and how it relates to the SLB, is left up to the issuer.
A further reason for the drop-off inSLBs stems from their use by non-financial companies, which have accounted for about 90% of their issuance thus far. SLBs give companies in hard-to-abate sectors access to sustainable financing and flexibility in using the proceeds, which would otherwise make issuing green or social instruments difficult.
What does the future hold for SLBs?
Current geopolitical events, such as the Russia-Ukraine conflict, have led countries to strike a balance between energy security and the energy transition to achieve their own national decarbonisation objectives.
While this has opened the door for some conventional energy providers to join the net zero transition, they must first demonstrate their commitment to lowering carbon emissions. SLBs can be an important source of funding for emissions reduction, but first, problems with credibility must be resolved.
In 2023, S&P expects increased use of SLBs to rise among sovereign debt issuers, particularly in emerging markets. One of the largest single issuances in 2022 was by Uruguay for $1.5 billion. According to data from Standard Chartered (LSE:STAN) $94.8 trillion is needed by emerging market economies to transition to net zero by 2050.
S&P believes that investor interest in the sustainability features of these instruments can increase sovereigns’ access to capital markets in low- and middle-income countries, beyond what they could achieve by issuing conventional bonds. Improving the credibility of their sustainability KPIs, therefore, becomes imperative for issuers in emerging markets.
Increasing concerns over transition risks have prompted many companies to accelerate their plans, especially in the cement, steel, buildings and transportation sectors, which are in the early stages of decarbonisation.
Rapid changes in regulations and rising economic certainty will also require companies in these sectors to remain financially flexible, which could be provided by sustainability-linked debt instruments, such as bonds and loans.
S&P’s forecast for a rise in the GSSS bond market is encouraging for sustainable finance, but the questions remain over SLB issuance. Reducing friction between issuers and the marketplace may require the International Capital Market Association to tighten up its SLB principles; resolving the challenge may prove critical to financing the transition for many issuers.
