Investors are turning to the climate debt market in record numbers with sustainability-linked bonds (SLBs) starting to make their mark.
Annual green bond investment is set to hit a record US$500 billion this year following rocketing demand in the first six months.
According to new sustainable debt market figures from the Climate Bonds Initiative, green investment reached US$227.8 billion in the first half of 2021 – a record for any half-year period since market inception in 2007.
That compares with US$297 billion in the whole of 2020 and previous Climate Bonds forecasts of between US$400-450 billion for this year.
Climate Bonds said the first-half demand for green bonds meant that the “long-awaited” milestone of US$1 trillion in annual green investment was now in sight for 2023.
Total volumes for labelled green, social and sustainability (GSS) bonds, sustainability-linked bonds (SLB) and transition bonds reached US$496.1 billion in the first half of 2021. That is 59% higher than the same period last year meaning the market is on track to reach record highs this year after a 2020 total of nearly US$700 billion.
Notably SLBs – forward-looking, performance-based debt instruments issued with specific key performance indicators and sustainability performance targets in place – recorded first-half issuance of US$32.9 billion. No SLB issuance was recorded in the same period in 2020.
There was a total of 61 SLB issuers of which 57 were corporates including oil and gas major Eni, UltraTech Cement, and Swedish fashion retailer H&M.
Voluntary SLB guidelines issued last year by the International Capital Markets Association allow for proceeds to be used to finance the transition of a company’s processes or business model by meeting specified KPIs. However, SLBs have attracted criticism as they can be structured to pay out to investors if the issuer misses its targets, thus rewarding them for investing in a firm that fails to improve its sustainability performance.
Potential for acceleration
“The green finance revolution is underway with a powerful beginning to a pivotal decade for climate action,” said Sean Kidney, Chief Executive, Climate Bonds Initiative. “These figures show the tremendous potential for acceleration in the market for this and following years. Reaching the vital milestone of the first US$1 trillion in annual green investment opens a green window in global capex flows against 2030 targets. Trillions towards clean technologies, transition and building climate resilience can become a reality. The climate emergency demands no less from policy makers, regulators and institutional investors.”
According to the Climate Bonds Initiative, green bonds have been soaring at a 49% growth rate in the five years up to 2021.
Developed markets contributed 76% of green bond issuance in the first half of this year with the share of emerging market countries rising from 18% to 19%.
Europe was the top issuing region overall – US$119.2 billion of green debt – from 352 issuers. Asia-Pacific issued US$51.9 billion and North America with US$42.1 billion.
Green debt issuance from non-financial corporates was up 162% year-on-year to US$64.7 billion with US energy company NextEra Energy and digital infrastructure company Equinix issuing the largest individual deals of US$1.5 billion and US$1.3 billion respectively.
Social bonds see sharp rise
Social and sustainability bonds (S&S) comprised 47% of labelled debt issuance with US$233.3 billion in the first half, up 18% year-on-year. That brings total cumulative S&S issuance since 2006 to US$867 billion.
Bonds issued under the social theme saw the sharpest increase, with their volume quadrupling in the first half from US$36.8 billion this time last year to US$146.6 billion. Sustainability bond issuance also recorded 20% of year-on-year growth. Social bonds related specifically to funding Covid-19 mitigation and/or recovery were not issued in the first half of this year, while in the first half of 2020 they amounted to US$88 billion.
In addition, Climate Bonds identified five transition bonds, which allow high emitters to fund their shift towards cleaner, more sustainable operations and strategies, totalling US$2.2 billion.
The most prolific corporate issuer was Italian energy infrastructure company Snam, which launched a dual-tranche bond for a total of US$909 million. The proceeds of the deal will be used to fund emission reductions, renewable energy, energy efficiency, green construction projects and the retrofit of gas transmission network to make it ready for lower-emission alternatives, including hydrogen.
Krista Tukiainen, Head of Research and Reporting, Climate Bonds Initiative, hopes COP26 will help keep green investment soaring.
“We are pleased that our initial projections for green bond market growth are likely to be exceeded as other thematic issuance proliferates across a range of sustainability and SDGs-related outcomes. Climate Bonds will continue to monitor the global GSS market and the development of the transition label,” Tukiainen said.
“We expect a stream of COP26 timed commitments from the financial sector, more sovereign green issuance and an acceleration of policy measures, including the EU bond programme, will all drive market growth towards a record 2021 and strong start in the first half of 2022.”