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GSS Bonds Suffer First Ever Slump in 2022

Interest rate hikes prompted a decline in GSS bonds for first time last year, but declining inflation forecasts offer brighter outlook for fixed income in 2023. 

Green, social and sustainable (GSS) bonds endured a difficult 2022, with the fixed income instruments declining in value and issuance volume for the first year on record. 

Climate Bonds Initiative’s (CBI) Market Intelligence report found green, social, sustainability, sustainability-linked (SLB) and transition bonds (collectively known as GSS+) had fallen from over a record US$1 trillion in 2021 to US$863.4 billion last year – forecasting a stronger performance in 2023. 

“We expect 2023 to be a stellar year for both green bond issuance and for climate action on the ground,” Sean Kidney, CEO of CBI said in a statement. Much of the action is expected to be driven by sovereigns, with half the world’s bond-issuing countries issuing green bonds to finance climate action and the EU, the US, India, China and Japan taking stronger action to meet 2030 reduction targets.  

While GSS+ volumes held their 5% share of the global bond market in 2022, the non-profit’s report said that “lenders were left reluctant to lock-in high-credit rates as the fixed-income landscape shifted, squeezing supply that historically has been outstripped by heavy investor demand”.  

The report found that green bond issuance made up just over half of GSS+ volumes in 2022 (US$487.1 billion). Of that total, sustainability bonds contributed US$166.4 billion, social bonds added US$130.2 billion, while SLBs and transition bonds made up US$76.3 billion and US$3.5 billion respectively. 

A report from financial markets data and infrastructure provider Refinitiv found that European bond and equity funds labelled as Article 8 and 9 – the former of which typically include a high exposure to GSS+ bonds – rose by almost 3% quarter on quarter in Q3 2022, reaching €43 billion in assets under management. This represents more than 50% of the region’s total funds. 

ESG investment advisory and portfolio analytics firm MainStreet Partners reported that it was a volatile year for GSS bonds, with a few months seeing less than €15 billion come to market, while others added more than €60 billion. 

Fixed income assets broadly struggled in 2022, with rising interest rates and soaring inflation impacting performance and issuance. In fact, global bond markets witnessed a 28% fall in volume to US$439 billion during the first 10 months of 2022, research from Fitch Ratings found.  

Additionally, global bond funds saw the largest capital outflows in two decades, with US$175.5 billion in cumulative outflows in the first nine months of 2022.  

Greener pastures in 2023 

Despite the overall decline in GSS bonds last year, a report from Intercontinental Exchange (ICE) showed there was an increase in ESG-linked bond certifications – especially in the US and China – with impact bond issuance rising to 63% of total green bond issuance, up from 55% in 2021.  

The outlook for the global bond market appears more favourable in 2023, with fixed income sales getting off to record start as approximately US$600 billion sold ahead of the lunar new year amid declining inflation forecasts. 

The CBI said a “stellar” 2023 is to be expected, with the organisation forecasting a rise in resilience-related investments – which could grow to as much as US$5 trillion by 2025 – accompanied by a growth in government support for green finance.  

It also highlighted that sovereign GSS+ bond volumes from 43 countries hit US$323.7 billion in 2022, with that momentum expected to continue into the new year with India, Israel, Ireland and Hong Kong already launching green bonds in 2023.  

APAC gains momentum  

Asia-Pacific (APAC) was the only region that saw year-over-year growth in issuance last year, while Europe, Middle East, and Africa (EMEA) remained the largest issuing region, totalling US$406 billion of impact bonds and comprising over half of global issuance, according to ICE’s report.  

Germany surpassed France as the largest issuing country in EU, with both countries maintaining a high certification rate of 97% to 99% respectively. 

Growth in certification was most pronounced in the US, which jumped from 59% in 2021 to 83% in 2022. It also found that China saw “notable gains” with an 82% certification rate in 2022, with the country becoming the largest issuing country globally, surpassing France as the leading issuer of impact bonds in 2022. 

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