Mirova study cautions investors on unpredictable pricing impact of growth of new asset class.
Investors should scrutinise the growth of sustainability-linked bonds (SLBs) to get a better handle on greenium levels in 2022, said French asset manager Mirova.
In a new study on the greenium – the higher price investors are willing to pay for green or other sustainability-related bonds, compared with conventional debt – the manager said the impact of SLBs on the greenium is a “big unknown”.
The level of the greenium, which Mirova describes as a “discrepancy between supply and demand”, has dipped, but remains exposed in the current environment, characterised by heightened risk aversion and volatility.
According to Mirova’s analysis, the greenium currently stands at 2.64 bps as a yield differential, albeit with wide variations across subsectors and issuer types. Mirova believes this will balance out to 2 bps for senior debt in 2022, and 5 bps for senior corporate debt (excluding financials).
Attracted by the flexible nature of SLBs, some issuers have moved away from green, sustainable, and social bonds, and the market could appeal to an even wider range in 2022. SLBs “flooded” the primary market in 2021, with issuances reaching more than US$100 billion, said Mirova.
SLBs differ from traditional sustainability-related debt in that they can be used to fund whole-entity transition to more sustainable business models, guided by specific targets and KPIs, rather than their proceeds being ringfenced for specific projects, widening the potential issuer base considerably.
Earlier this month, the Climate Bonds Initiative reported that green, social and sustainability-themed debt issuance grew by 57% compared to the previous year, reaching almost US$1.1 trillion in 2021. Further, annual green bond issuance increased by 75% from 2020 levels, reaching US$522.7 billion.
It seems likely that several sectors, particularly within cyclicals, could be attracted by the SLB format, said Mirova. In these sectors, the greenium will depend on the proportion of green bonds versus conventional bonds and SLBs, so could potentially be higher.
Sectors that issue large amounts of SLB relative to green bonds will “exacerbate” the greenium, said Mirova, citing industrials, consumer goods, pharmaceuticals and technology. The high-yield market will also play a role here as issuers have begun to express a clear preference for SLBs over green bonds.
Comeback for covered bonds
In contrast, Mirova noted that financial institutions, particularly banks, are less likely to issue SLBs (regulators do not currently recommend issuance) and prefer to issue green bonds.
In 2022, Mirova expects a “major comeback” for green senior preferred banking debt and covered bonds issued by banks. “With central banks gradually tightening their monetary policies, covered bonds (more than half of which are rated AAA) and senior banking debt (often rated above A), are likely to dominate corporate bond issuance as a growing number of countries, both inaugural and historical, will be issuing debt,” said the study.
Calculating the greenium for SLBs is complex, said Mirova, as the bonds are less uniform and standardised, including multiple KPIs and a wide range of formats.
“In 2022, the greenium is likely to evolve in a positive interest rate environment, characterised by the achievement of the European Taxonomy and the structural convergence between green bond indices and more conventional global aggregate indices. Furthermore, the emergence of SLBs could slow down the growth of the green bond market, preventing the greenium from shrinking in some sectors,” the report said.