As expected, 2021 saw global sustainable fixed income markets reach and exceed the US$1 trillion mark in issuance. The new record was driven by an explosion in the issuance of sustainable debt by public sector entities and by corporates, particularly real estate companies. Green bonds issuance almost doubled while the issuance of sustainability-linked bonds (SLBs) grew to almost ten times its level last year.
Going forward, the market consensus seems to be for another buoyant year in sustainable fixed income markets in 2022.
Green Bonds Dominate & SLB Growth Explodes
In 2021, green bonds remained the dominant focus of the market, representing over 55% of all sustainable bonds issued according to data from Danske Bank and Bloomberg. However, the popularity of SLBs continued to grow during 2021, with SLB issuance expanding from US$10.5 billion in 2020 to US$100.1 billion so far this year. H&M set the trend for the year in February, with the issuance of a €500 million SLB tied to the increase in the share of the usage of recycled materials and the reduction of CO2 emissions.
“The introduction of Sustainability-Linked Bonds has opened up the sustainable bond market to issuers who didn’t necessarily find a place in the green bond market. This can be companies with limited capex investments, and where the use-of-proceeds setup simply doesn’t work, or it can be companies that are not yet green enough but who have set ambitious targets to get there. Again, it is about transparency as well as accountability and where SLB creates a link between the issuers sustainability performance and cost of capital,” says Nina Ahlstrand, Head of Sustainable Finance at Norwegian bank DNB. “As of Q3, 15% of bond volumes issued in the Nordic region had a sustainable label (including green, social, sustainability and SLB), up from 8% in 2020. Globally the number was 5%, up from about 2% in 2020,” Ahlstrand adds.
Sectorally, supranationals, sovereigns and agencies (SSAs), and corporates led the way, representing approximately 40% and 36% of the market, respectively. Within SSAs, two transactions, in particular, stand out.
The Nordic market was particularly important for corporates, with issuance in Swedish Krona representing 43% of this sub-segment. Among corporates, real estate was dominant in the Nordics, where it represented over 65% of the private sector market according to data from Danske Bank and Bloomberg. The real estate sector is a crucial part of tackling climate change. According to the UN Environment Programme Finance Initiative (UN EPFI), “the buildings sector” contributes to 30% of the annual global greenhouse gas (GHG) emissions and consumes around 40% of the world’s energy. Thus, the issuance of sustainable bonds, particularly of the green variety is crucial for the fulfilment of the Paris Agreement’s commitments.
A Buoyant 2022 Ahead
Going forward, the market expects sustainable fixed income markets to continue to grow, with everyone expecting SLBs to continue to drive growth. “We predict continuous growth in 2022, with potential to reach US$1.5 trillion in issuance. Euro-denominated issuance will continue as the main driver, with the EU, corporate issuers and the SLB format as the main drivers of added issuance,” says Lars Mac Key Head of DCM Sustainable Bonds Danske Bank.
At Swedbank, Katya Nolvall, Head of Sustainable Capital Markets, sees three trends continuing into 2022. “First, we expect issuers to continue finetuning the SLB set up through combining green and sustainability-linked elements. For example, we have seen Bank of China introducing sustainability linked loans as a green eligible asset category, the renewables company Verbund has issued a bond complying with both green and sustainability-linked criteria and Grängers has written a combined green and sustainability-linked bond framework enabling the issuance of either green of sustainability-linked bonds. Second, we expect the International Capital Market Association (ICMA) to give more guidance for best practice on the communication of ESG strategy and targets in part one, “about the company”, in ESG related frameworks. Finally, following the ratification of the Sustainable Finance Disclosures Regulation (SFDR) in March 20210, investors are increasingly looking for information on their investments’ EU Taxonomy alignment, both on the company and bond levels.
Although DNB also expects SLBs to continue to grow in 2022 it is keeping an eye on EU regulations. “With the proposed introduction of an EU Green Bond Standard, we expect to see issuers with large enough investments in EU Taxonomy-aligned activities to start issuing EU Green Bonds. This may become a gold standard in the European market, but in the short- to medium term, we do not expect it to crowd out green bonds following other standards. The Taxonomy-aligned share of the market can be expected to so far be very low, and it doesn’t yet cover all sectors. Standards can be expected to rise naturally over time, and to reach the Paris Agreement we need to see all sectors contributing. Green bonds, irrespective of standard, should still provide investors with additional transparency, making it easier for them to identify sustainable investments,” Ahlstrand adds.
“As corporates set Science-Based Targets at a rapid pace – aligned with the Paris Agreement and suitable for Sustainability-Linked financing – we see a great potential for growth in SLBs, already a dominant product in the loan market. We predict a potential 2022 slowdown in Social Bond issuance if the pandemic alleviation need decreases, e.g. the EU shifted into Green Bonds in 2021 – post-pandemic rebuild of the economy will partly be green,” Mac Key argues.
DNB is more sanguine about social bonds. “Ever since the start of the pandemic, we have seen a stronger focus on social factors (and higher issuance volumes of Social Bonds). That focus is likely to withstand the test of time, but also (as issuers and investors become more used to seeing well-rounded and multi-facetted sustainability structures that capture the most material aspects for the issuer in question) we are likely to see even more structures featuring both social and environmental aspects – as well as one of the two only in the cases where that is more relevant,” says Anna Reuterskiöld, Investment Banking Associate Sustainable Finance DNB Markets.
The increase in issuance will certainly be welcomed by investors who are starting to see premia on green and other sustainable bonds rise potentially beyond their comfort.
In the beginning of April, at Phenix Capital’s online Impact Summit, Peter Lööw, Head of Responsible Investment at Alecta, warned against demand driving this greenium too far up. “The problem is that we are seeing very significant demand for green bonds in the Nordics, which pushes the limit on the pricing of those bonds. This is causing us to opt-out of some opportunities these days because they are just too expensive,” Lööw said on that occasion.
“The problem is how much you should pay for that. It’s acceptable to pay perhaps one or two basis points (bps), but we have seen instances of 10bps and 20bps. That’s a little bit too much for us. I’m hoping it’s an issue that supply can fix,” he said noting that the present level of demand is likely to make the issuance of green bonds a standardised and more approachable funding channel for an increasing number of borrowers,” Lööw added.