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Europe’s ESG issuance sees green bonds up but loans down: AFME

© Shutterstock / MonthiraGreen bonds.

The latest report from trade body the Association for Financial Markets in Europe (AFME) shows a quarterly increase of ESG bond and loan issuance, but year-on-year volume is on the decline due mainly to the impacts of the Ukraine crisis.

New data from the AFME shows that Europe’s ESG bond and loan issuance is experiencing a slowdown, in line with wider macroeconomic trends.

This slowdown is mainly due to economic instability brought on by the Ukraine crisis, and shares of ESG bonds and loans remain more or less stable when considering total bond and loan issuance in Europe.

The slowdown will be short-term, as the demand for ESG bonds will increase long-term due to the accelerating shift to net zero.

Issuance of green, social, transition and sustainable bonds and loans in Europe experienced a small bump in Q2 2022, showing 16.5% quarter-on-quarter growth according to AFME. However, issuance volumes are still one-fifth lower when considering year-on-year growth.

The decline is mainly due to wider macroeconomic issues which have slowed down prospects for global economic growth, a culmination of post-pandemic recovery and the Ukraine crisis exacerbating inflationary pressures and tightening the purse strings of many sovereign funds.

ESG bonds were not the only bonds to experience a decline in the first half of 2022. A report from financial analysts Moody’s found that overall global bond volumes were approximately 20% lower in the first quarter of 2022 than during Q1 2021, which contributed to the lower issuance of ESG-labelled bonds.

ESG bonds see growth, but loans see decline

In Q2 2022, ESG bond and loan issuance amounted to a total of €174.9 billion in Europe, with ESG-labelled bonds accounting for the majority of this volume. Despite overall decline of ESG issuance, ESG-labelled bond issuance experienced a modest year-on-year increase of 6%.

The stable growth of bond issuance is primarily driven by green bonds, which saw a significant year-on-year growth of 47.9%, as well as a whopping 92.5% quarter-on-quarter growth. This growth was due mainly to issuance by the sovereign and supranational sector, led by tap issues from the EU commission and French and German sovereign issuers.

While green bond issuance benefitted from a significant increase in Q2, social and sustainable bond issuance went in the opposite direction and no transition bonds were issued in Europe in H1 2022.

Social bond issuance experienced a year-on-year decrease of 51.3%. This sharp drop can be attributed to a significant slowdown of social bond insurance from the European Commission.

While sustainable bond issuance increased by 23.4% compared to Q1 2022, overall these bonds saw a 37.5% year-on-year decrease in Q2. This is mainly due to a sustainable bond market slowdown following a record Q1.

When considering loan issuance, sustainability and green linked loan issuance decreased 46.5% to €51.6 billion in Q2 22 compared to the previous year. Sustainability-linked loans accounted for three-quarters of the issued loans in Q2, with green-linked loans making up the remaining quarter.

Overall, ESG bond issuance represented 19.1% of total European bond issuance during H1 22, more or less the same proportion as the previous year. However, sustainability and green link loans experienced a slight drop in market share, going from 25.4% of total European syndicated loan origination in FY2021 to 22.8% in H1 2022.

Market headwinds will keep ESG issuance flat in 2022, but long-term growth remains positive

The results of ESG bond and loan issuance in Europe for the first half of 2022 are in line with market predictions and global trends. Earlier this year, Moody’s downgraded their forecast for sustainable bond issuance in 2022 from $1.35 trillion to $1 trillion. This forecast downgrade means that the sustainable bond issuance market will end more or less at the same levels of the previous year.

Moody’s expects that by the end of 2022, the world will have issued $550 billion of green bonds, $125 billion of social bonds, $175 billion of sustainability bonds and $150 billion of sustainability-linked bonds.

Despite the stagnant market growth this year driven by wider economic impacts and market volatility of the Ukraine crisis, the long-term forecast remains positive for the ESG bond market and Moody’s see this slowdown as a short-term blip as the world transitions towards net zero.

Accelerated decarbonisation efforts to achieve net zero and growing regulatory attention on sustainable finance to ensure system resilience will continue to drive the market demand for ESG bonds globally going forward.

Once the market stabilises, the Ukraine crisis could actually also drive demand for green bond issuance in Europe as countries rapidly invest in renewable energy plans in a push for greater energy security by reducing dependence on Russian gas.

In addition, the Ukraine crisis has also brought into greater focus the need for social bonds by highlighting the continued need to raise capital for social projects to support humanitarian crises in fragile and conflict states.

Ultimately, while the Ukraine crisis caused a slowdown in ESG bond and loan issuance in Europe during the first half of 2022, it also put the spotlight on key issues that can impact financial and social stability, which could actually spur ESG bond growth over the long-term.

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