Non-financial sector is set to dominate green, social and sustainable bond issuance, says PwC, to fund low-carbon transition.
Fixed income securities linked to environmental and social projects could make up half of all new bond issuance in Europe by 2026, according to new research.
As much as €1.6 trillion of new green, social and sustainability (GSS) bonds could hit the market in 2026, says new data from PwC Luxembourg and Strategy&, PwC’s strategy consulting business unit.
The report forecasts between €1.4 trillion and €1.6 trillion in new issuance in Europe, based on a survey of 100 investors and 100 bond issuers.
The forecast would represent a significant acceleration in the growth of the ESG-related bond market. Last year, new issuance of GSS bonds as defined by PwC totalled €500 billion, which accounted for approximately 13.7% of the European total. PwC does not include in its GSS definition bonds that are not directly tied to specific sustainability projects. This rules out sustainability linked bonds, which are designed to finance whole-company transition to sustainable business models.
The report highlighted several predicted trends for the next few years as the European GSS bond market expands. Public sector issuance could hit €712 billion by 2026, which would mark a 168% increase on last year’s total of €266 billion.
Green bonds will account for approximately 49% of the GSS market, PwC’s report predicted, based on its “base case” of total issuance of €1.4 trillion. Social bonds are expected to make up 23% and sustainable bonds 28%.
Corporate issuance on the rise
The report also forecast that non-financial corporate issuers will play an increasingly important role in the GSS market, accounting for more than 49% of all European issuance by 2026.
Such bonds could appeal to chief financial officers as “transition financing tools” as companies seek to align themselves with the European Union’s developing requirements for sustainable business models.
Olivier Carré, Financial Services Market Leader and Sustainability Sponsor at PwC Luxembourg, said there was set to be a “seismic shift” in capital flows as a result of political and regulatory changes in the EU, such as the Sustainable Finance Disclosure Regulation.
For companies seeking to transition towards a more sustainable business model, he added, GSS bonds could help with project finance, while also providing investors with assets to boost their own sustainability credentials.
The vast majority of issuers – 84%, according to the PwC report – plan to increase GSS-related issuance in the next two years. Within this group, nine in ten intend to increase issuance by more than 5% and more than a third want to increase by more than 20%.
PwC’s report said many GSS issuers and chief financial officers were “highly challenged by a lack of understanding” of this area of the bond market. To address this, the consultancy said, issuers need to settle on their own definitions of sustainability and related terms, before then selecting the appropriate financial instrument to their needs.
After identifying projects suitable for GSS bond financing, issuers then need to develop their expertise through an appropriate combination of internal and external resources. Finally, PwC explained, issuers should seek to “build trust” through strong governance structures around risk monitoring and reporting requirements.
Short and long-term growth
Green bonds and other fixed income securities tied to sustainable projects have experienced a rapid growth in interest from investors. Social bonds in particular were boosted through the early stages of the Covid-19 pandemic as issuers sought to raise money for specific support projects.
Depending on definitions, total predicted issuance for 2022 can reach as high as PwC’s forecast for 2026.
Rating agency S&P Global forecast global sustainable bond issuance to exceed US$1.5 trillion this year as organisations seek to tackle their energy transition challenges. The increasing importance of the UN’s Sustainable Development Goals will also boost issuance, S&P Global said.
The Climate Bonds Initiative has put the expected 2022 global issuance figure at US$1 trillion, after global GSS-themed bond issuance rose by more than 57% to hit US$1.1 trillion in 2021.
Asset manager NN Investment Partners predicted that €900 billion worth of GSS bonds could be issued in 2022, including €500 billion in green bonds, which would be a record for a single year’s issuance. The EU alone is aiming to issue as much as €250 billion worth of green bonds as part of its Covid-19 recovery plan.