Europe leads the way as US falls behind, while “absence of clarity” plagues transition-labelled products.
Green, social, sustainability, sustainability-linked and transition (GSS+) bonds are shaking off recent macroeconomic and geopolitical volatility, with the market on track to hit US$5 trillion in combined issuance by the end of the year.
The latest market update from the Climate Bonds Initiative (CBI) has revealed that GSS+ finance volumes reached US$4.2 trillion by the end of the H1 2023, including US$448 billion in aligned GSS+ debt. The latter nonetheless represents a 15% year-on-year decline compared to H1 2022.
Green bonds made up 62% of the total aligned GSS+ debt (US$278.8 billion), the report noted, with financial firms contributing 29% (US$79.6 billion) of aligned green volumes. Sovereigns were the third largest issuer type, with nine countries contributing US$52.4 billion (19%).
“Though sustainable finance is on its way to being a US$5 trillion market, we need to see US$5 trillion of sustainable finance being raised annually in the latter half of the decade, to prevent future climate collapse,” said Sean Kidney, CBI’s CEO.
The Euro was the “dominant currency” of aligned GSS+ deals for the sixth consecutive year, making up 47% of H1 volumes at US$210.9 billion. The EU and European Investment Bank issued US$6.5 billion and US$13.2 billion in aligned green bonds respectively. Germany issued US$15 billion in aligned green bonds and Italy US$13 billion.
A separate report published by the Association for Financial Markets in Europe (AFME) said that European ESG bond and loan issuance accumulated €151 billion (US$165.3 billion) in proceeds during Q2 2023, a 23.9% year-on-year decline. However, half-year volumes for ESG-labelled bonds did increase by 17% year-on-year, a trend predominantly driven by Q1 green bond issuance, AFME said.
Europe also dominated social issuance, the CBI report noted, accounting for 54% of the total volume in H1, with half issued by government-backed entities and US$10 billion issued by financial corporates.
The region has “the most advanced policy regulations which motivate issuers to price transparent and ambitious deals, while a quorum of investors with dedicated mandates makes the currency attractive to issuers of GSS+ debt from around the globe”, the CBI said.
In March, the European Council and Parliament reached an agreement on a voluntary standard for EU green bonds, requiring issuers to ensure all proceeds are invested in taxonomy-aligned economic activities. The EU Green Bond Standard is expected to be adopted this autumn.
In comparison, aligned GSS+ volume originating from the US “fell sharply” to US$39.8 billion in H1 of this year, the CBI report said, down from US$65 billion in H1 2022.
“The anti-ESG political rhetoric in the US may have contributed to this 39% decline in volume,” according to the report.
2023 analysis conducted by data and research provider Morningstar noted that anti-ESG funds have seen a slowdown in inflows this year.
Transition bond confusion
Aligned GSS+ bonds bearing a transition label have experienced “lacklustre” growth so far in 2023, according to the CBI.
Transition-labelled bonds amounted to US$772.6 million in H1, compared to US$2 billion in H1 2022.
These bonds are mainly used to finance sectoral or regional climate transition roadmaps for hard-to-abate sectors.
The CBI recorded ten issuers (down from 21), with deals originating from China, Japan and the European Bank for Reconstruction and Development (EBRD).
“The lacklustre growth in deals bearing the transition label is due to absence of clarity and established standards for the label, making its application confusing for issuers,” the report said, adding that “clear policy support” in Japan and China in hard-to-abate sectors is contributing to the momentum of transition bonds.