European environmental, social and governance (ESG) bond and loans issuance rose by a hefty 227% to €188.7bn in the second quarter from the same period last year, although volume slipped 3% from the first three months in 2021, according to the AFME Q2 Sustainable Finance Report.
Breaking it down, ESG bond issuance was robust, hitting the €109 bn mark in Q 2 2021, a significant 184% hike from the second three months in 2020.
As of June 21, 2021, ESG bonds represented 17.7% of total European bond issuance. It was split into 8. 8% green bonds, 7.1% social bonds, and 1. 8% sustainability bonds.
The report found that around 60% of ESG bonds were issued by the official sector (predominantly government bonds), 35.5% by corporates and 0. 4% by the asset and residential backed securities spheres.
The top three issuing countries and supranationals accounted for 60.2% of the total followed by EU institutions comprising 21.4%.
France with a 26% chunk, was far ahead of the curve on the country charts followed by Germany at 12.8% of total issuance. Italy, Spain and the UK rounded out the top five.
The European Commission was among the most active institution with €56 3 bn in ESG bonds during Q 2 2021. The biggest chunk was in social bonds continuing a trend started in 2020.
Overall, since last November, the EU has issued €89 6 bn in social bonds under the SURE (Support to Mitigate Unemployment Risks in an Emergency) scheme which aims to provide emergency loans of up to €100 bn to 18 countries to back government furlough schemes keeping workers on the payroll.
Drilling down to the individual segments, green bond issuance, which has been the most popular, jumped 79% year on year to €60.1bn in Q2 from €33 5 bn during the same time in 2020.
Green bonds typically fund projects that have positive environmental and/or climate benefits. The majority are labelled as “use of proceeds” or asset linked. While the money raised is directed towards green projects, they are also backed by the issuer’s entire balance sheet.
Social bonds issuance rose 74% to € 33.5 bn from €19 2 bn during the same timeframe while sustainable bonds reported a healthy 138% hike to € 15 6 bn.
Aside from the SURE scheme, proceeds of social bonds are generally used to raise funds for new and existing projects that tackle a specific social issue and/or seek to achieve positive social outcomes.
Social objectives may include – but are not limited to- affordable housing and basic infrastructure as well as employment generation and sustainable food systems
There is also socially responsible investing or SRI, which emphasises not only the financial gains from an investment but also ethical or social change.
Sustainable bonds, on the other hand, sits between the two and proceeds are split between green and social projects.
In regard to supply, ESG bonds averaged € 41. 6 bn per month during 2021. This was almost double the average monthly € 21 04 bn in the full year of 2020 and €14 6 bn in the first six months of last year.
Looking at valuations, the report noted that spreads of corporate ESG bonds against non-sustainable benchmarks stabilised during Q2 2021.
ESG premia tightened from 9 basis points in April 2020 to 1bp on average during the months of April – July 2021.
As for loans, ESG and green linked also enjoyed buoyant growth, increasing by a dramatic 191% to €78.6 bn in Q 2 2021 from €27 bn in Q 2 2020.
The majority of issuance or 67.4% in the second quarter was in the syndicated loan market in social bonds while green bonds represented 32.5%.
The top three issuing countries comprised 47.2% of total ESG and green linked loans issuance with France once again leading the charge, issuing 19% of the tally. Italy came in second at 15.6% and Spain was third at 12.5%.
In terms of ESG funds in general, inflows continued to grow at a rapid pace during the second quarter across all asset classes except for money market ESG funds.
The final score for funds with an ESG mandate (including mutual funds and exchange traded funds) was $4.36tn as of Q2 2021, a $200bn increase from $4.16tn in Q1 2021.
ESG equity funds remain by far the favourite and largest asset class with 57 of total ESG funds. This was three times larger than fixed income which came in at 17.
The report also noted that it was a busy time on the regulatory calendar. The highlights included the EU Taxonomy Climate Delegated Act which set out technical criteria for defining activities that contribute substantially to climate change mitigation and adaptation as well as the European Commission’s proposed Corporate Sustainability Reporting Directive (CSRD) which aims to amend the Non-Financial Reporting Directive.
The goal of the CSRD is to introduce a more detailed rulebook for how large companies operating in the EU disclose both their sustainability risks and their impact.
Meanwhile, the Financial Conduct Authority launched two consultations, looking at introducing disclosure rules, which are aligned with the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD), for both listed companies and certain firms such as FCA-regulated pension providers.
©Markets Media Europe 2021
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