Global issuance of environment, social and governance (ESG) labelled bonds could reach $4.5 trillion per year by 2025, according to a new report – Bonds That Build Back Better -from Pictet Asset Management and the Institute of International Finance (IIF).
Figures from ING show that, €875 ($973) 
billion of global sustainability of bonds were issued in all currencies where the use of proceeds was linked to green, social, sustainable and sustainable development goal (SDG) frameworks.
The report noted that although ESG investing has historically been focused on equity markets, fixed income will play a greater role in providing the $4 trillion of capital required annually until 2030 for the transition to a low carbon economy.
“The development of ESG-labelled bonds is an area of the market we have been watching closely for some time,” said Raymond Sagayam, CIO fixed income, Pictet Asset Management.
He added, “The analysis from IIF and Pictet Asset Management investment teams reaffirms our view that there is set to be a silent revolution in fixed income markets that will benefit investors, the environment and society.”
Sonja Gibbs, managing director and head of sustainable finance at IIF, said, “By 2025, there will be few global investors who don’t have a significant allocation to ESG and green investments.
And if you look further ahead to 2050—when governments and companies around the world will be seeking to deliver on net-zero commitments—we will have effectively greened global bond markets, transforming our environment for the better.”
To date, products in this space range from green fixed income securities with specific use-of-proceeds requirements to sustainability-linked debt whose coupons are tied to the environmental performance of governments, corporations and social bonds.
ESG-labelled bonds are also likely to become bigger features of emerging world sovereign and corporate debt markets with issuance increasing from $50 billion per year in 2020 to $360 billion by 2023.
Climate aligned bonds are also expected to feature prominently although as the report notes, they do not carry an ESG label or follow common principles, but are issued by firms that contribute directly to the clean energy transition, which could “add further heft and variety to the market”,
The Climate Bonds Initiative estimated the size of the non-ESG labelled climate-aligned bond market at more than $£900 billion in 2020.
“If the transition in global bond markets keeps pace with energy consumption patterns, the climate scenarios set out by the Network for Greening the Financial System [NGFS] imply that the size of the climate bond universe – ESG-labelled climate bonds and climate-aligned bonds – should reach $25 trillion by 2025 and over $32 trillion in 2030, even under current climate policies,” said the report.
Despite the positives, the report also notes that due to their complexity, ESG bonds can be costly to analyse, requiring far greater scrutiny than their conventional counterparts.
In addition, they currently do not fit neatly into the portfolio construction frameworks investors tend to favour.
©Markets Media Europe 2022
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