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    Will 2021 Sustainable Bond Flows Reach US$1 Trillion?

    Stockholm (NordSIP) – Despite challenging market conditions due to the COVID-19 pandemic, 2020 was another record year in sustainable bond issuance, which reached US$547.6 billion by the end of the year. Green bonds, SSAs (sovereigns, supranationals and agencies), corporates and the Nordics pushed the cumulative sustainable bond issuance over the US$1 trillion mark in September. With US$1.2 trillion in cumulative issuance by year end, the hope going forward is for annual flows to aim for the US$1 trillion target.

    COVID-19 Dampens First Half of 2020

    The year started with a bang. 2019 had been a buoyant year, and the market expected global green bond issuance to break US$1 trillion of cumulative issuance by the summer. Early issuance behaviour was supportive of this optimism. By mid-February, global green bond issuance was up 14 per cent compared to 2019, according to Bloomberg data. France and Chile alone had issued a combined US$5.5 billion equivalent in four transactions. The IBRD issued a NOK thematic “sustainable development” bond that attracted strong demand among Nordic investors, not least DNB. The bonds had an environmental tilt focusing on  water and ocean resources and dealing with plastic waste pollution. As late as the start of March 2020, state-owned Icelandic electricity generator Landsvirkjun was issuing privately-placed sustainability-linked bonds tied to the company’s carbon sequestration targets.

    By the end of March, however, the market shifted its focus onto the coronavirus. Pfizer came to the market with an sustainability bond to fund its efforts to fight COVID-19. Among the Nordics, Alecta, Folksam, Skandia and Länsförsäkringar supported efforts by the IFC, NIB, AfDB, the IBRD and the EIB to fill funding gaps created by the pandemic. In the middle of April, Swedish healthcare equipment provider Getinge even issued green commercial paper.

    However, the shift in focus and the market chaos led issuance to fall below 2019 figures by the end of March. Despite a Taxonomy-compliant NOK ticket from the EIB and green bonds by NIB, Stora Enso, Kommuninvest and SpareBank1 Boligkredit, issuance continued to lag behind 2019 levels during the second quarter of 2020. By the end of the first half of 2020, global green bond issuance had fallen 11% compared to the same period of 2019. The Spring also coincided with a decrease in COVID19 issuance.

    However, the pandemic left an indelible mark on sustainable bond markets. Social and sustainability bonds have historically accounted for 3% to 10% of the total sustainable bond issuance. The pandemic increased that contribution to 40% in 2020, and these types of bonds collectively contributed the most growth to sustainable bonds during the year.

     

    Normalisation and Growth

    In the Nordics, the Summer of 2020 was a time of normalisation. At the start of June, the announcements of the much-awaited green bonds from the governments of Sweden and Germany focused market participants and shored up confidence. Considerations by the Danish central bank regarding the structure of potential Danish sovereign green bonds also contributed to this sense of normalcy. On the issuance side, the green loans to fund Northvolt’s clean batteries captured the market’s imagination at the end of July. The Swedish Export Kredit Corporation (SEK), K2A and KommuneKredit also ventured into the green bond market through July and August.

    With US$92 billion of Sustainable Bond issuance, September 2020 more than doubled the previous US$43 billion monthly record seen in November 2019. In the Nordics, the inaugural SEK20 billion 10-year green bond by the Swedish government, which received over twice as much in bids, displayed the region’s appetite for green finance. In parallel to Sweden’s efforts, Germany did as much if not more for the green bond market with its inaugural €6.5 billion 10-year zero-coupon ticket.

    The global automotive sector also embraced environmental finance during September with Daimler, Honda, Volkswagen and Volvo issuing €6 billion in green bonds. Another summer trend was the continued appetite for real estate green bonds as exemplified by successful funding from Arwidsro, Bonava, Nivika and Kungsleden. September also saw the EIB issue its first EU Taxonomy-aligned SEK CAB, Exergi launch a triple tranche green bond and Ulf Erlandsson unveil the Anthropocene Fixed Income Institute with the support of the Growald Family Fund (GFF). On the back of these and other transactions, September inevitably completed the much-awaited US$1 trillion milestone of total cumulative global green bond issuance.

    October was also a strong month, with a Sustainability-linked bond from Chanel, a Baltic Sea blue bonds from the NIB, a Forestry green bond from Tornator and the first non-indexed ISK green bonds thanks to Reykjavik Energy and Reginn. However, it was the SSA segment where the biggest splash occurred with the European Commission issuing €39.5 billion in Social Bonds, as part of its Euro 100bn Unemployment Risks in an Emergency (SURE) programme, expected to be concluded by the end of 2021. The end of the year saw Landshypotek, Heimstaden, Sparebank, Citycon, and Eurofima come to the market. At the same time, Kommuninvest launched a SEK7 billion green bond, second only to the Swedish government’s September behemoth.

    The Nordic Contribution

    As our coverage shows, investors and borrowers in Sweden, Denmark, Norway, Iceland and Finland continued to embrace sustainable finance. Nordic SSAs, real estate, energy and even some automotive companies continued to issue green bonds, while institutional investors proactively supported COVID-19 mititagion efforts.

    Sustainable bond issuance from Nordic countries grew by 18% to reach US$26.7 billion in 2020. While only 60% of global sustainable bonds were green, green bonds represented 92% of all sustainable bonds from Nordic issuers. Globally, Euro and US Dollar sustainable bonds issuance was dominant, followed by Swedish Krona, where foreign issuers represented 30% of the market.

    Danske Bank was the leading Nordic dealer for global sustainable bonds, global green bonds and global social bonds, as well as by Nordic issuers, in Scandinavian currency issuance, and Swedish Krona issuance, followed by Nordea and Swedbank.

    A Prodigious Year Ahead?

    “2020 was both a challenging and encouraging year. We are very pleased to be the most successful Nordic arranger of sustainable bonds in 2020 and humbled by issuers’ continued satisfaction with Danske Bank’s competence to structure and sell their sustainable bonds,” says Lars Mac Key, Head of DCM Sustainable Bonds at Danske Bank.

    “Despite all the worrying circumstances, 2020 saw the highest monthly volume of sustainable bond issuance in September and green bonds passed the US$1 trillion milestone. Investors have genuinely embraced ESG considerations. In a sign of the times, euro investment grade ESG bond funds stood their ground and enjoyed US$16 billion of net inflows, while normal bond funds saw a net outflow of US$20 billion,” he adds.

    Going forward, the future looks bright for the sustainable bond market, Mac Key explains. Indeed, it looks as though the ground is now set for the market to potentially issue as much in the next twelve months as in the combined past ten years.

    “Efforts to fund pandemic alleviation led to an 800% increase in social bond issuance and to new social bond mandates and funds. Sustainability-Linked Bonds (SLB) now have ICMA Principles in place. They are a fantastic complement to issuers who have not been able to enter or participate in the green or social bond market as much as they wanted due to lack of fixed assets and investments,” he explains.

    “Given prevailing investor behaviour, the shift of governance in the US and the stronger sustainability regulations and reporting to issuers and investors, I think there is potential for a 30% increase in sustainable bond issuance in 2021 to reach US$700 billion. The big uncertainty is SLBs. If they are able to reach their potential in 2021 we could see a doubling of the sustainable bond market in 2021, potentially allowing them to break through US$1 trillion of issuance in next year,” Mac Key concludes.

    Image by Gerd Altmann from Pixabay

    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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