Global sustainable bond issuance to rebound in 2023
Moody’s forecasts green, social, sustainable and sustainability-linked bond issuance to stage a tentative recovery this year following a decline in volumes in 2022, with structural tailwinds offsetting prolonged macroeconomic risks and elevated market concerns over greenwashing.
After dropping to an estimated $862 billion last year from a record-high of $1.05 trillion in 2021, global sustainable bond issuance is likely to bounce back to around $950 billion in 2023, according to new analysis by Moody’s Investors Service.
In its global sustainable finance outlook report, the ratings agency outlined expectations for a comeback in sustainable bond issuance, driven by robust supply and demand fundamentals – from the public and private sectors’ efforts to decarbonize, to increased government spending worldwide on sustainable development.
Moody’s also highlighted that growing pressure on issuers to enhance sustainability disclosures and an increased focus on blended finance mechanisms, would also underpin sustainable bond supply, returning the market to a growth trajectory.
While these drivers and constraints lead to a mixed story for 2023 issuance, what remains clear is the long-term penetration and influence of sustainability in the capital markets
This forecasted return to growth is welcome, but Moody’s warns there are also key constraints that will likely keep volumes below their 2021 highs. Chief among them are lingering macroeconomic uncertainty and rising interest rates, together with greater investor scrutiny and concerns around greenwashing.
Moody’s adds issuers are also navigating an increasingly complex ESG regulatory and political landscape, which, it argues, may lead some issuers with global operations to pause plans to issue sustainable debt until there’s greater clarity on how best to articulate their sustainability objectives.
“While these drivers and constraints lead to a mixed story for 2023 issuance, what remains clear is the long-term penetration and influence of sustainability in the capital markets”, says Matthew Kuchtyak, vice president of sustainable finance at Moody’s Investors Service. “This year the focus for investors and issuers alike will be on quality over quantity.”
Indeed, sustainable bond volumes continue to reach new highs in terms of their share of the broader bond market, with a record 13% of global bonds being labelled as sustainable in 2022, rising to 15% in 2023, according to Moody’s.
Sustainable growth momentum
Breaking down the $950 billion of sustainable issuance by label, the ratings agency forecasts $550 billion of green bonds, $150 billion of social bonds, $175 billion of sustainability bonds and $75 billion of sustainability-linked bonds, or SLBs.
After dropping to $482 billion last year from a record $555 billion in 2021, global green bond issuance is forecasted to rebound to $550 billion this year, driven by an expanding number of issuers seeking to finance net-zero implementation strategies, and exploring increasingly diverse uses of proceeds, including water, adaptation, nature and biodiversity projects as well as climate mitigation.
By geography, European issuers dominate green bond issuance – last year they issued $244 billion of green bonds, accounting for 51% of the global total – and Moody’s expects this dominance to continue, with overall issuance supported by rising activity among Asia-Pacific and North American issuers. By sector, non-financial corporates led issuance last year – selling $174 billion of green bonds, accounting for 36% of global supply – but supply from financial institutions is catching-up; new sales hit $135 billion in 2022, equivalent to 28% of the market, up from 19% in 2021.
These themes are likely to fuel sustainable bond issuance from sovereign and sub-sovereign issuers, not only supporting growth in overall volumes but also driving diversification in the use of proceeds of labelled bonds
Importantly, as more issuers aim to finance their net-zero ambitions and transform their business strategies to adapt to rising policy and market risks, Moody’s expects labelled sustainable bond issuance from companies in sectors highly exposed to carbon transition to likely be important drivers of new supply this year. Such sectors include oil and gas, coal mining and terminals, regulated and unregulated utilities, chemicals, auto manufacturers, and transportation and logistics.
Year-on-year growth in issuance volumes is similarly expected in sustainability bonds and sustainability-linked bonds, yet Moody’s says supply of social bonds – dominated in recent years by sales from sovereigns and government agencies – will likely fall this year to $150 billion from $163 billion in 2022. In the main, this is due to issuance being constrained “by the lack of sizable social projects, especially now that pandemic-related financings are largely in the rear-view mirror,” according to Moody’s.
In contrast, issuance growth is forecasted for sustainability bonds and SLBs – volumes are expected to hit $175 billion and $75 billion, respectively, in 2023 – due to several factors, not least the growing market attention on the interplay of environmental and social considerations.
Moody’s also believes the heightened focus on social issues will drive sustainability bond issuance, where issuers are increasingly aiming to tie together green and social objectives in combined use-of-proceeds structures.
While growth in SLBs is also expected this year, it is, however, likely to remain relatively subdued amid heightened investor scrutiny of “the relevance, ambition and rigor of issuers' targets, as well as the materiality of financial penalties associated with these structures,” says Kuchtyak.
He adds: “Enthusiasm around SLBs has cooled somewhat as the nascent market struggles with differentiating the strongest from weakest targets and structures. For example, an increasing area of focus among decarbonization targets has been whether an issuer's targets incorporate material scope 3 emissions.”
As the global sustainable bond market continues to grow and develop, some of the challenges it faces are part of the maturation process.
The public sector will undoubtedly play a critical role in finding solutions to these challenges.
“Cross-border collaboration took centre stage at COP27 as energy security, climate adaptation financing, multilateral development banks' role in blended finance and the so-called ‘just transition’ rose up the policy and investor agenda,” says Rahul Ghosh, managing director of sustainable finance at Moody’s Investors Service. “These themes are likely to fuel sustainable bond issuance from sovereign and sub-sovereign issuers, not only supporting growth in overall volumes but also driving diversification in the use of proceeds of labelled bonds.”
We expect this continued focus on adaptation financing in emerging markets to grow as the assessment of physical climate risks improves and governments increasingly focus on building climate resilience
Sovereign sustainable bond issuance has steadily expanded in recent years as more sovereigns have entered the market – global issuance hit $115 billion in 2022, the second highest volume after a record-high in 2021 – and increasingly from emerging markets.
Emerging market sovereigns issued $25 billion of sustainable bonds in 2022, accounting for 22% of all sovereign sustainable bonds globally, the highest share in the past five years. For emerging market governments, in particular, climate-related use of proceeds are rising up the agenda with issuance growing by 56% in 2022, according to Moody’s. In comparison, climate adaptation and mitigation accounted for 27% and 39% of emerging market sovereign use of proceeds issuance, respectively, last year.
“Adaptation-related financing has been of particular importance for emerging market sovereigns in recent years, averaging an approximate 28% share of proceeds since 2018. We expect this continued focus on adaptation financing in emerging markets to grow as the assessment of physical climate risks improves and governments increasingly focus on building climate resilience,” says Adriana Cruz Felix, vice president of sustainable finance, at Moody’s Investors Service.