Green, social and sustainability (GSS) bonds have become an embedded part of the investment landscape thanks to an increase in both investor demand and regulation fuelling interest. However, some studies show that while the trajectory is upwards, there could be a few bumps along the way.
A recent study by NN Investment Partners expects the GSS) bond market to grow to a total of € 1.1 trillion in 2022 due to the urgency to finance the energy transition and look for fossil alternatives.
However, Refinitiv’s recent Sustainable Finance Review First Quarter 2022 showed that in the first three months, global sustainable finance bonds totalled $231.7 billion, a decrease of 19% compared to the same period in 2021 and the first year-over-year decline since records began.
This is mainly due to geopolitical risks triggered by Russia’s invasion of Ukraine as well as a tightening monetary policy around the world to combat spiralling inflation.
By number of issues, volume jumped 13% compared to the first quarter of 2021 while bonds increased 8% compared to the fourth quarter of last year.
The Refinitiv report said that despite the quarterly proceeds drop, the totals still marks the fifth consecutive quarter to surpass $200 billion and over 400 issues.
As a percentage of global debt capital markets proceeds, sustainable finance bonds accounted for a 9% during the time period, down from 11% a year ago.
Breaking down the different components, green bonds which are the most popular, saw issuance slip 7% to $110.4 billion compared to 2021 levels and a two-year low.
Proceeds though surpassed $100 billion for the fifth consecutive quarter. By number of issues, 303 green bonds were brought to market during the first quarter of 2022, an increase of 5% versus a year ago and the highest volume for a first quarter period on record.
Social bond issuance had the worst showing, sliding 52% to $44.0 billion while sustainability bond issuance was off by 15% to $41.7 billion during the time horizon.
The survey noted that corporate issuers, which registered a 5% increase compared to a year ago, comprised 63% of the market, up from 48% a year ago.
Corporate sustainable finance bond offerings accounted for 10% of global corporate debt issuance during first quarter 2022, on par with year ago levels. Agency and sovereign issuers were responsible for 35% of overall activity during the first quarter of 2022, down from 51% a year ago.
On a geographical basis, European issuers were the largest players, with 50% market share, far ahead of the Americas, at 23% and Asia Pacific at 21%.
This is not surprising in that the European Union has a more established sustainability culture and legislative framework encouraging sustainable investment.
The report from NN IP, believes that the recently-introduced Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy will be a spur to growth.
In addition, market participants believe that the European sustainable bond rules will also be a catalyst, The Council of the European Union has recently given the green light to proposals creating European Green Bonds regulation which lays down a foundation for uniform requirements for issuers of bonds that wish to use the designation EuGB for their environmentally sustainable bonds made available to investors in the bloc.
They also establish a registration system and supervisory framework for external reviewers of European green bonds.
The European Commission launched its EuGB regulation proposal in July 2021, as part of a series of initiatives aimed at promoting a more sustainable financial system and help facilitate the necessary investments to advance the EU’s and global climate goals.
They are designed to help facilitate the financing of sustainable investments through the creation of a ‘gold standard’ for how companies and public authorities can use the securities to raise funds on capital markets, while meeting rigorous sustainability requirements and protecting investors from greenwashing.
Key components include requiring EuGB designated bonds to fully allocate funds to projects aligned with the EU Taxonomy, provide full transparency on how bond proceeds are allocated, and be checked by an EU-supervised external reviewer to ensure compliance with the regulation.
Following the agreement in the EU Council, negotiations will begin with the European Parliament to draft a final version of the European Green Bond text.
“Environmentally sustainable bonds are one of the main instruments for financing investments related to green technologies, energy efficiency and resource efficiency as well as sustainable transport infrastructure and research infrastructure,” said the Council in a statement.
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