Stockholm (NordSIP) – As 2023 ended, and since the World Bank issued the first green bond in 2007, the global market for sustainable bonds passed the €4 trillion in issuance, according to Danske Bank. Meanwhile, in the Nordics, the sustainable bond market grew by 460% between 2018 and 2023 and saw total cumulative issuance pass the €200 billion mark last year.
To take stock of 2023 and peak into what 2024 might hold, NordSIP reached out sustainable bond dealers at Swedbank, Danske Bank, Nordea and the Anthropocene Fixed Income Institute (AFII).
Despite its continued relevant, corporate issuance seems to have taken a hit in the Nordics, where real estate companies found rising interest rates less accommodating. Meanwhile, financial institutions continued to dominate, even breaking new (social) ground while the Danish sovereign finally entered the market. Globally, public issuers, particularly national government and international development banks continued to lead the way. From a format perspective, green bonds remain the dominant form of sustainable financing although corporates continue to explore the possibilities offered by sustainability-linked bonds.
Nordic SSAs Do Not Buck Global Trend
Digging into the data, one can see that there are some important differences in the structure of the Nordic market vis-à-vis global trends. According to data from Nordea, 2023 alone saw global issuance in excess of US$1 trillion, dominated by green bonds and by sovereigns, supranational and agency (SSA) issuers, which represented 47% of the market, followed by financial institutions (FIG) (27%) and Corporates (26%).
Sustainable bond issuance by the World Bank, the governments of Netherlands, the UK, France, Germany, Germany, Italy and Columbia, the EU, and the Industrial and Commercial Bank of China (ICBC), among others, ensured the global leadership of SSAs.
Looking at the specific instruments used, green bonds remained dominant, accounting for 60% of the sustainable bonds, ahead of social bonds, sustainability bonds and sustainability-linked bonds (SLBs).
In the Nordics, issuance reached US$61 billion, according to Nordea, while Danske Bank argues that the market witnessed an 8% annual growth relative to 2022. Nationally, Swedish issuers continue to be the biggest contributors with 36% of the issuance volume, ahead of Norwegians (25%), according to Danske Bank. Danish issuers have become more prominent and represented 22% of the market in 2023, ahead of Finland’s 14%. The rest was divided between the Nordic Investment Bank (3%) and Iceland (1%).
However, and in contrast to global trends, SSAs are the smallest issuance group in the Nordics (18%), behind FIGs (43%) and corporations. Nordic financial giants are well represented among the FIGs issuing sustainable bonds, including DNB, Danske Bank, Nordea (the region’s largest FIG issuer) and Swedbank (not least with its social bond). Corporates, include companies such as Ørsted, Neste, Vestas and Ericsson, while the government of Denmark, Kommunekredit and Kommuninvest represented SSAs. According to Danske Bank, Swedish municipal issuers were also active, with 12 municipalities issuing sustainable bonds. Last but not least, Denmark’s inaugural green bond is one of the reasons for the country’s rising prominence in the market during 2023.
Finnish Corporates Embrace SLBs
In the Nordics, green bonds are much more dominant and social and sustainability bonds are almost inexistent whereas they jointly represent a third of the global market. Nevertheless, SLBs kept and even increased their popularity among Nordic issuers, representing 9% of the market in 2023.
Finnish issuers such Nokia (Telecoms), Terveystalo (Healthcare), Nokian Tyres (Auto Parts & Equipment), Fiskars (Housewares), and Metso (machinery) joined the market with SLBs in 2023. According to Janne Koivula, Associate, DCM Sustainable Bonds, at Danke Bank, “this showcases well how SLBs have made it possible for issuers from a wide range of sectors to access sustainable bond market. In the Nordic market, the targets and the level of ambitiousness are also somewhat less of an issue than in some other markets, and we expect the upward trend in SLBs in the Nordics to continue also in 2024.”
Tough Economy Puts a Dent on Real Estate Issuance
The aforementioned facts notwithstanding, recent and important changes in the momentum of different market sectors seem to be hiding behind these aggregate figures. Despite their dominance, it seems that the global rise in interest rates put a dent on corporate issuance, while SSAs appear to have made a showing.
“We saw a significant decline in corporate issuance activity due to higher yield environment and especially the RE issuers felt the heat. Real Estate issuers have typically contributed a significant share of corporate sustainable bond issuance and their absence from the market put a lid on the hopes of increasing sustainable bond activity in 2023. To put this in perspective, in 2018, 85% of Nordic corporate sustainable bonds were originated by Real Estate issuers, but in 2023 the share was only 15%. The drastic change in yield environment was the main driver behind that development and many RE issuers struggled and even temporarily lost access to bond markets,” says Koivula.
“On the other hand, sustainable bond issuance by sovereigns increased compared to 2022, and also financials slightly increased their issuance, and in the end the total issuance in the sustainable bond market in 2023 was very close to 2022 volumes, but still far away from the all-time high sustainable bond issuance year 2021,” Koivula explains.
“Financial sector issuers have kept increasing sustainable bond issuance every year since 2018. The reason behind this development is that more and more financial issuers are putting green and sustainable financing frameworks together and conducting part of their financing in the sustainable format. Going back to the corporate bond market, the issuance of SLBs in 2023 was heavily subdued compared to 2022 and 2021. This was largely due to investor criticism over weak target structures in terms of ambitiousness of the targets as well as low financial penalties in case targets are missed,” Koivula adds.
The Rise of Biodiversity and Keeping an Eye on Fossil Fuels
Looking at the market from another vantage point, the Anthropocene Fixed Income Institute (AFII) noted the rise in prominence of biodiversity and nature loss as well as the need for sustainable investors to keep a careful eye on what fossil fuel companies are doing.
“Biodiversity and nature loss really moved forward as a theme in investment management, and paired with new EU regulations on deforestation-free supply chains, the discussions in the fixed income space on the topic just took off. The market is in its infancy in terms of evaluating deforestation exposure in a mainstream portfolio: data is scarce, and exposure runs across several heterogenous sectors,” says Ulf Erlandsson, AFII’s CEO.
“On the fossil issuance side, there were a few headline-grabbing deals, with ConocoPhillips August US$2.7bn issuance a standout, with the proceeds targeted for purchase of oil sands assets. According to AFII’s calculations, the financed acquisition would push the company above the ‘5% revenue from oil sands’ limit than many investors have as an exclusion rule. Indeed, we already started seeing a few divest. We also saw a number of funds with such oil sands exclusions rules still buy the bonds, as the revenue threshold breach will not be officially reported until 2024,” Erlandsson adds.
“The refinancing of the Aramco balance sheet through a Luxembourgian special purpose vehicle called Greensaif was a major ‘public-to-private’ transaction, obscuring emissions accountability. The structure means that Aramco’s ESG scores do not translate into the SPV bonds, even if its credit ratings do. This allowed Greensaif to issue $4.5bn in bonds attracting sustainability investors that were unlikely to have wanted to invest in Aramco directly,” Erlandsson continues.
Issuance to Hold in 2024?
Looking ahead to 2024 improving economic conditions are expected to facilitate a stabilisation in sustainable bond issuance. “We’re expecting similar ESG bond volumes in H1’24 as in H1’23, with similar trends limiting volumes such as higher funding costs, although we see signs of improvement. The green bond format is expected to continue to dominate,” says Lucas Rintala, Sustainable Capital Markets Analyst at Swedbank.
Looking at SLBs the AFII expects to see these instruments continue to mature in 2024. “There was some moderation in sustainability-linked bond issuance during the year, markedly weaker than for green bonds. We think 2024 is going to be an important year to see if SLBs will evolve: with a stronger quantitative focus on the impact potential of the instrument, we think it is a compelling structure that can create value for investors, but time will have to tell if the market agrees,” Erlandsson says.
From a sectoral point of view, Danske Bank expects real estate to pick up. “For 2024 the issuance conditions are expected to be less adverse and hence, we expect the share of RE issuers to slightly pick up, but not to the levels seen in 2019-2021 when close to half of the total Nordic corporate sustainable bond issuance was originated by RE issuers,” Danske Bank’s Koivula adds.
“We expect the issuance to increase both globally and in the Nordics compared to 2023, however it is unlikely that we would see a higher issuance globally than in 2021 which has so far been the all-time high issuance year,” Koivula concludes.
