In an oversubscribed market, greater opportunities for investors lie in social, sustainable, SLBs and blue bonds.
Investor demand for green, social, sustainable, sustainability-linked and transition bonds (GSS+) is far outstripping supply, the Climate Bonds Initiative’s (CBI) Green Bond Pricing in the Primary Market H2 report illustrates.
“Thematic bonds have issuers and investors head over heels for one another! Green and other labelled bonds carry huge demand, are regularly oversubscribed, and deliver results for issuers even as tough times cause fixed income to falter,” said Sean Kidney, CEO at the CBI.
“With US$5 trillion of annual investment needed by 2025 to avert environmental catastrophe, labelled bonds provide the catalyst to get capital to climate causes,” he added.
In the GSS+ bond market, green bonds are the most established label and account for over half of labelled volumes. Candace Partridge, Lead Green Bond Analyst at the CBI, told ESG Investor there is likely to be increased focus on social, sustainability-linked (SLB) and blue bonds this year, which could provide greater opportunities for investors.
Appetite for social, SLB and blue
The diversification of investment into different GSS+ bond labels is “hugely important”, according to Partridge, whose responsibilities at the CBI also include being Social and Sustainability Bonds Data Manager. “There’s going to be a continued diversification in labels,” she said.
Partridge added that this shows the “continuing growth and increased maturity in the market”, and that sophisticated issuers are “not restricting themselves to strictly green but also taking on the thorny issue of social issues”.
While the rest of the GSS+ universe is dwarfed by the size as the green bond market, Partridge suggests that the throughput issuance on a monthly and yearly basis is becoming comparable to that of the green bonds.
According to data from the CBI, GSS+ bonds reached collective volumes of US$863.4 billion in 2022. Green bond issuance made up just over half of labelled volumes in 2022, totalling US$487.1 billion. This was followed by sustainability bonds contributing US$166.4 billion, social bonds US$130.2 billion, and SLBs seeing US$76.3 billion in volumes.
“It may not be reflected in the issuance, but the word on the street is there lots of questions around social issues,” she said. “How can we issue that around this? How can we hold it accountable? How can we be rigorous with our targets and our impacts?
“We are moving into a space where it’s no longer just climate considerations. We’re also looking at social resilience,” she added. “It feels as if the green market and the standards around green are fairly developed, and the social side is playing catch up, the SLBs are similar.”
The number of SLBs being issued are rising and she said that there is a “huge amount of interest” around them, with the CBI working on developing improved methodologies around handling them.
SLBs have previously been accused of acting as a “platform for greenwashing”, with the proceeds not specifically having to be used for sustainable causes as is the case with green bonds. However, the flexibility afforded by these types of bonds have been welcomed in some regions, including Africa where they have surpassed social and sustainable bonds in popularity.
The CBI also keeps a close eye on greenwashing. “We always have this concern, but this is exactly why we do what we do,” she said.
“We go into the frameworks, the prospectuses and the use of proceeds and we tear these bonds apart to see what they are actually trying to accomplish,” she said, adding that the CBI scrutinises their intended goals and whether are in alignment with its methodology and taxonomy.
Blue bonds are becoming increasingly prevalent in the bond market, and with the recent finalisation of the High Seas Treaty eyes are increasingly trained on the marine ecosystems these bonds look to conserve.
The Philippines’ Securities and Exchange Commission has confirmed it will introduce a new blue bond framework by Q2, with the regulator previously setting guidelines for the issuance of green bonds allowing companies to raise funds for climate and environment projects.
US$1 trillion AuM global asset manager Nuveen also made an anchor investment in the Barbados Blue Bond, purchasing 80% of the bond. It will see US$50 million spent over the next 15 years to assist in the conservation of at least 30% of Barbados’ marine space.
“In the past year that we’ve had more come to market,” Partridge said. “There’s still a minority so it’s hard to identify trends when you don’t have a strong signal yet, but there is growth potential in that sector when they can meet the right criteria.”
The CBI screens and includes blue bonds as part of its database, but Partridge admitted a need to delve deeper into biodiversity and conservation impacts, with its current water criteria only covering more developed infrastructure such as sewers and storm resilience and drainage.
Greedy for green
The CBI’s report sampled 72 green bonds with a combined face value of US$79 billion priced between July and December 2022. Green bonds continue to be in high demand from investors, with the report noting that “issuers can rely on this strong appetite from dedicated investors which has also undoubtedly contributed to the strong pricing dynamics we have consistently seen for green bonds over the past few years”.
Green bonds in euro book cover saw average oversubscription at 3.6 times, while in US$, book cover saw average oversubscription of five times, with the oversubscription for green bonds higher than for their vanilla equivalents.
Twenty eight of 50 (58%) green bonds saw greater oversubscription compared to vanilla equivalents in euros, while in US$ 79% achieved larger book cover.
“There are more investors with ESG-centric mandates, competing for a continued limited supply of labelled debt,” Partridge said. “Labelled bonds are still best in class and that sends a signal to investors that this is appropriate for you to take into your portfolios.
“It’s an easy way to identify assets that will match up with their investment mandates and as such, there’s more pressure and competition to get in on most deals then you would see for vanilla and that’s reflected in the pricing dynamic and the over subscription rates,” she added.