Environmental, social and governance (ESG) labelled bond issuance in emerging markets could increase to $360 billion in 2023, from just $50 billion in 2020, according to Pictet Asset Management and the Institute of International Finance, the global association of the financial industry.
The fund manager and IIF said in a report, ‘Bonds that Build Back Better’, that green fixed income securities with specific use of proceeds requirements, sustainability-linked bonds with coupons tied to issuers’ environmental credentials and social bonds are innovative structures vying to go mainstream. Issuance could reach $4.5 trillion per year by 2025 according to research undertaken by the IIF for Pictet. In comparison, sustainable bond issuance in 2021 was $1.1 trillion which took the size of the ESG bond market to well above $2 trillion.
While most of that issuance comes from the developed world, emerging market ESG bonds are also needed for developing economies to meet the United Nations’ Sustainable Development Goals (SDGs) by 2030.
Raymond Sagayam, chief investment officer and Equity Partner at Pictet Asset Management, and Sonja Gibbs, managing director and head of sustainable finance at IIF, said in the report: “The SDG financing gap – the difference between what emerging nations require and what they currently receive in investment – is estimated to be about $2.5 trillion per year.”
The baseline projection in the report is that ESG-labelled bond issuance in emerging markets could increase to $360 billion in 2023 (see graph), bringing emerging markets to over 22% of the total volume, more than double its current 10%.
“Among emerging markets, China – with its goal of climate neutrality by 2060 – is expected to remain dominant, accounting for over half of emerging market issuance through 2023,” said the report. “Under favourable market conditions, our bullish scenario, issuance of ESG labelled bonds among emerging market borrowers could reach $2 trillion by 2025.”
However, they highlighted the risk that some sovereign borrowers may be unwilling to open themselves up to the scrutiny required to establish and maintain large ESG bond issuance programmes, particularly those that are still developing – or lack – debt management expertise.
The report said: “Such difficulties could be even more acute in countries with limited public debt transparency; in some cases, there may be political sensitivities about having policy conditionality ‘imposed’ by foreign investors given the use of proceeds and performance obligations that come with ESG-labelled bonds.”
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