Rising volumes bolster resilience and adaptation but concerns about real economy impact persist.
The sustainable bond market has reached a cumulative total of US$1.7 trillion outstanding at the end of 2020, despite the pandemic hitting markets, according to an annual report by Climate Bonds Initiative (CBI).
Yet, questions remain how to ensure that issuance of sustainable debt — combined new issuance of green, social and sustainability bonds stood at US$0.7 trillion — will create the intended impact in the real economy.
The social bond market saw a ten-fold increase in 2020, reaching US$249 billion in issuance compared to the previous year. Regionally, China was the nation responsible for the largest amount of social bond issuance, with US$68 billion. Europe was the largest source of green debt in 2020, with US$156 billion out of a total of US$290 billion.
The sustainability bond market jumped by 131% in size to US$160 billion in 2020.
Sean Kidney, CEO of Climate Bonds Initiative, commented: “The rise of social and sustainability issuance indicates welcome market developments towards building resilience and adaptation measures as part of sustainable development.”
At a webinar which presented the released report, panellists discussed the role of financial markets in creating sustainability in the real economy.
Ingo Speich, Head of Sustainability and Corporate Governance at Deka Investments, explained that specific German exclusion criteria for mandated funds prevent investments in green bonds issued by high-carbon emitting companies.
“This is a big issue for us, in practical terms, to make sure that we can really encourage transformation because the risk of the parent company still [exists]. As long as the parent company, in the utility sector for example, emits a lot of carbon, this will be reflected on the green bond as well,” he said, adding that he expected impact funds under EU regulation to drive the green bond market growth further.
“When investors may have multiple portfolios invested, across hundreds of thousands of companies, there [needs to be] a way they can aggregate that information to their underlying investor base as well,” he said.
Beyond data issues, Speich highlighted the importance of verification. He asserted that the transformative potential of green bonds would only be realised through implementation of the infrastructure needed to monitor whether the use of proceeds have been adequately applied.
“I believe that transformation [of the real economy] is key, and transformation has to go hand-in-hand with acceptable investment returns. If this is possible, we can clearly make an impact, but we have to act now and we have to make sure that we still [stay] on the right side of the market,” he added.
During 2020, the growth of the green, social and sustainability bond markets was fuelled by government recovery efforts to ‘build back better’.
Kidney said “the emergence of a transition label points towards the pathways investors and corporates in basic industries must take towards net zero”.
Separately, Natixis issued a green bonds review for Q1 2021, which highlighted that despite the boom in green and sustainable issuance volumes across all market segments, the supply-demand imbalance accelerated since the end of last year.
“Negative new issue premiums are becoming widespread for green and sustainable issuance in the euro credit market,” the review noted.
It also observed, besides the ‘greenium’ in the primary market, a more widespread application of a ‘greenium’ in the secondary market since last autumn.