Environment, social and governance (ESG) bond and loan issuance volumes in the second quarter declined 20.7% year-on-year (YoY) but increased 16.5% quarter-on-quarter (QoQ), according to the latest Association for Financial Markets’ (AFME) European ESG Finance quarterly data report.
The aim of the report is to provide detailed data and analysis on the rapidly growing sustainable finance market in Europe.
ESG bonds and loans include ESG-labelled (proceeds-base), sustainable-linked and transition bonds as well as green-linked and sustainable-linked loans.
The report said that ESG bond issuance represented 19.1% of the total European tally during the first half of this year compared to 14.5% in the first quarter and 19.5% for the full year of 2021.
It also noted that following a record Q1, the sustainable-linked bond market decelerated in Q2’22 with a decline in issued amount of 47% YoY and 59.3% QoQ, reversing its previous upward trend.
The ESG securitisation market also slowed from 2021, accumulating a total issued amount of €0.5 billion in H1 2022.
ESG-labelled bond issuance continued to be resilient in Q2’22 with a 6% YoY jump, predominantly driven by the green bond segment which grew 47.9% YoY.
The sovereign sector led the green bond expansion. Market conditions may have prevented a more significant participation by the corporate sector, which dropped 2% YoY in green bond issuance.
EU and UK forward curves continue to anticipate long-term price increases.
As for global ESG funds, mutual and exchange traded funds slid 16.7% to $6.5 trillion in Q2’22 from Q1’22.
The report attributed the quarterly decline mainly to valuation losses. Net outflows from ESG funds totalled $37.5 billion in Q2’22 which represents less than 5% of the decline in the total amount of global ESG funds.
In terms of ESG price premia, spreads of corporate ESG bonds against non-sustainable benchmarks have widened in the second quarter.
ESG premia, however, continues to fluctuate between 2 to 3 basis points and has not reached the levels observed in 2020.
The greenium varies by issuer and by instrument, suggesting that in addition to the sustainability features, other technical factors such as liquidity may influence yield premia against conventional bonds.