The global sustainable bond market is set to bounce back following a drop in 2022 due to deteriorating credit conditions, according to a new report from S&P Global Ratings.
It predicted that sales of green, social, sustainable and sustainability-linked (GSS) could reach $900 billion to $1tillion in 2023, as market conditions improve. This comes after sales hit a record of $1.06 trillion in 2021, before falling to just over $850bn in 2022.
A separate study by AXA is also optimistic. It noted that valuations are looking attractive after a rebound in yield levels at the end of 2022, and an increasingly compelling longer-term picture for bonds should be beneficial to GSS bonds given their credit exposure and sensitivity to interest rates.
“The GSS universe currently enjoys an attractive yield pick-up compared to the conventional universe and looks better positioned to benefit from a decline in yields and compression of credit spreads,” said Johann Ple, green, social and sustainability bonds strategy manager at AXA IM.
The French fund manager also believes that investor demand for GSS bonds will stay strong, as they are transparent and measurable, which will attract new investors and issuers as investment accelerates.
One reason is that the transition to net zero requires massive investment of up to $3.5 trillion a year between 2022 and 2050.
Breaking it down, the S&P Global research found that green bonds were the main drivers of issuance, accounting for half of all sustainable bond sales last year. The momentum is expected to continue this year. as companies look to finance net zero commitments.
Social bonds represented less than 20% of total sustainable bond sales in 2022 but issuance tapered off and the appetite could remain lacklustre this year.
This is because the growth in 2020 and 2021 was due to the demand for pandemic relief funds and this has waned as economies re-opened.
However, as the S&P Global report points out, the increasing need for affordable housing could help help fuel issuance of sustainability bonds, which address both social and environmental concerns, said S&P.
“Issuers in the public housing sector may look to develop green social housing options. Banks, in addition, could look to combine access to affordable finance with existing green lending initiatives,” the report stated.
It added, “Further, public finance and supranational entities may look to the sustainability bond market to finance more environmentally friendly social infrastructure such as schools, municipal buildings, hospitals, roads and energy.”
Last but not least are the relatively new sustainability linked bonds (SLBs), which are issued with specific sustainability performance targets (SPTs), containing key performance indicators (KPIs).
The aim is to encourage issuers to improve their sustainability practices, and as a result pay lower rates to bond holders.
The S&P Global report said that SLBs were on track for the first half of 2022 to surpass their already rapidly-growing levels seen in 2021, although they ended the year lower, at $70.5 billion n compared with $94.4 billion.
It attributed the decline to the volatile credit conditions that affected the bond market widely.
In addition, SLBs came under scrutiny as questions were raised over targets their issuers had been setting and whether they were effective at improving sustainability.
These bonds, unlike green use-of-proceeds bonds, have flexible conditions that vary as companies meet or fail objectives set at issuance.
“To get back to growth in 2023 and beyond, issuers of SLBs will have to find ways to address concerns flagged by market participants about the credibility of SLBs, namely surrounding issuer ambitions and incentives to achieve sustainability targets,” the report stated.
AXA IM is also forecasting greater sector and regional diversification for green bonds, with more issuance from US corporates on the back of the US Inflation Reduction Act in addition to an upturn in European issuance driven by the RePowerEU programme, and a pick-up in issuance from emerging markets.
The Reduction Act is the Biden administration’s $370 billion package of subsidies for clean energy while the RePowerEU programme with total funds close to €300 billion aims at ending the EU’s dependence on Russian fossil fuels and tackling the climate crisis.
It includes about €225 billion of untapped loans made available under the NextGenerationEU pandemic recovery plan launched in 2021.
AXA IM described the outlook in the social and sustainability markets as “more nuanced” but expects more corporate social bonds and strong US dollar issuance to continue in the sustainability format.
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