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Pandemic Spurs Growth and Diversity in Sustainable Bond Market

Most non-green volumes financed pandemic-related investments in H1 2020, says Climate Bonds Initiative.

The sustainable debt market performed strongly in the first half of 2020 with more than US$250 billion issued versus US$341 billion for the full year of 2019, according to a new report by the Climate Bonds Initiative (CBI).

While the sustainable debt market has been dominated by green bonds, the share of other themes has increased this year, both in terms of amount issued and number of issuers.

Compared with 2019, when US$250 billion of green bonds were issued, market composition has shifted, with a more even split between themes. In the first half of 2020, green bonds issuance of just under US$100 billion accounted for around 40% of the total market. Remaining activity was distributed among social and sustainability bonds, with pandemic-related investments making a new entry.

The slowdown in green bond issuance in the first half of 2020 was largely a function of the impact of the pandemic on private sector issuance and is expected to be only a temporary phenomenon.

“H1 2020 volumes dropped to below half of 2019 levels in every region, with the exception of Latin America due to continued sovereign issuance from Chile. The bulk, however, came from Europe, which represented more than half of the global total (55%) for the first time,” the report stated.

Sustainability bond volumes exceeded their recent growth trajectory and have already surpassed 2019 issuance levels. Growth in the first half of 2020 can be largely attributed to supranational issuers, which accounted for 77% of new issues, with development banks the dominant issuer type.

The CBI split out pandemic-related bonds from social bonds, identifying the first issuance with a label related to Covid-19 in China in February, by Zhuhai Huafa Group. Chinese issuers account for almost 90% of pandemic-themes bond issuance, most of which has a tenor of five years or less.

Largely driven by Covid-19 response measures, social bonds achieved higher volumes in H1 2020 than in any other previous 12-month period. Government-back entities are the most common issuers, accounting for 40% of cumulative volume.

“The fact that a large part of social and sustainability bond issuance in H1 2020 financed Covid-19 response measures means that most non-green volumes – and likely around half of the total sustainable debt market – financed pandemic-related investments in H1 2020,” the CBI noted.

The CBI attributed the growth and evolution of the sustainable debt market in 2020 to date partly to the progress made in major markets on the supporting frameworks for sustainable investment, specifically adoption of taxonomies in Europe and China.

In addition, the CBI reported the pandemic had provided a valuable opportunity for change, with the need to reboot economies via the ‘build back better’ agenda. An increased use of labelled debt by governments and other public sector issuers “could send a clear market signal while contributing to the development of domestic sustainable financial markets, and attracting a more diversified investor base”. The CBI noted that this depends on fiscal constraints, but observed that low interest rates provided grounds for good debt affordability, especially in more developed markets.

In the longer term, the CBI argued the case for further alignment between economic objectives and social and environmental considerations, beyond the urgent needs of pandemic-related stimulus.

“Central banks must work closely with finance ministries to set a post-Covid recovery that integrates the ‘build back better’ agenda of green stimulus packages – for instance, through targeted purchases of ‘green-resilient’ assets and preferential loans complementing the progress being made on climate and other risk assessments,” it noted.

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