Global green bonds reached record levels in the first half of 2023 while sustainability-link bond (SLB) issuance slowed down, according to an industry report from Linklaters.
The worldwide law firm found that there were a total of 1758 sustainable bond products issued in the first six months of 2023 raising $568 billion, with most sustainable bond categories other than SLBs seeing an increase against H1 2022.
Overall, green bonds continued to dominate the sustainable bond scene with 935 valued at $351 billion – an all time six month high in terms of the value of capital raised from investors.
It said that this puts 2023 on course to be a banner year for issuance.
Green bonds are used to fund green projects such as renewable energy, clean transportation, and long-term water management.
Government backed entities, non-financial and sovereigns have been among the most active although this year, banks usurped their position issuing $123 billion or the bulk of money raised in the first half
Linklaters attributed this is to the increasing number of low-carbon projects that banks see as investable through bond structures.
While Asia Pacific saw significant growth, Europe remains in pole position as home to the largest green bond market with 448 green bonds issued so far this year, raising a total of $190 billion.
Linklaters said that the growth is against the backdrop of a continually evolving regulatory landscape in Europe, with the EU Green Bond Standard expected to be adopted in the autumn.
The standard aims to create a voluntary label to reinforce the sustainable ambitions of the green bond market.
It is designed to help direct capital flows to Europe’s sustainable objectives as described in the EU Sustainable Action Plan, promoting transparency, and supporting integrity of the market.
In contrast, SLBs, which have seen rapid year-on-year growth since the first half of 2021, experienced reduced activity in the first six months.
Linklaters believed the fall is due to increased regulatory scrutiny around SLBs, plus additional public criticism of selected schemes, in an attempt to identify greenwashing. This trend has been particularly visible in the EU.
“As the urgency of the climate transition intensifies, so too will scrutiny of sustainable finance products, ” said Ben Dulieu, capital markets partner at Linklaters.
He added, “Greenwashing is at the top of the agenda for regulators across the world and recent developments such as the political agreement on the EU’s Green Bond Standard will aim to bring increased transparency and confidence to the market.”
Market participants share his view. One of the main criticisms of SLBs is that there is a lack of consistency around how SLB issuers set their ESG targets and what qualifies as ambitious or not.
The view is that there needs to be greater rigour as the market expands. The bonds are relatively complicated and require issuers to put frameworks in place and collect information that hasn’t been collected before.
Recent analysis from Alliance Bernstein further outlined the challenges, noting that SLBs are designed to incentivise issuers to raise ESG standards across their business.
The fund managers explained that issuers set key performance indicators (KPIs) to help gauge progress toward the goals, and nearly all SLBs provision a potential coupon step-up if the goals aren’t met.
However, since KPIs are self-determined, ensuring consistent and ambitious results can be challenging, and step-ups may not occur even if ESG targets are seemingly missed.
In addition, when issuers miss relevant KPIs, it believes the step-up acts similar to compensation for a credit quality downgrade, in which the higher coupon helps insulate investors from bond price deterioration.
It said missing KPIs also means that investors aren’t meeting their ESG goals-a key reason they invested-which we believe warrants further investigation.
As a result, Alliance Bernstein points out that SLBs-more than most other ESG-labeled bonds-need close watching for potential greenwashing, the practice of a company misleading investors about its commitments to environmental improvement.
This explains why that until these challenges work themselves out, the SLB market will be subject to disparate spreads and other idiosyncrasies, according it its research.
©Markets Media Europe 2023
