Global issuance of ESG-labelled bonds is poised to rebound to US$950bn this year as the market continues to mature and diversify, although issuance is expected to remain below 2021’s record US$1.05trn volume, according to a report by Moody’s.
Challenging market and macroeconomic conditions and greater scrutiny over perceived greenwashing and the quality of transactions and targets is expected to temper the pace of recovery and put companies under pressure to demonstrate the quality of their deals.
"We're expecting about 10% growth in the global sustainable bond space. We're expecting a rebound in issuance but not quite to the level that we saw in 2021," said Matt Kuchtyak, vice-president for sustainable finance at Moody’s.
Companies’ decarbonisation commitments are expected to accelerate transition-related issuance and high-emitting firms will face increasing pressure this year to follow through with credible implementation plans that can be benchmarked as work continues on transition pathways for each sector.
Policy support for green capital spending in many countries, such as the Inflation Reduction Act in the US and Europe’s Green Deal Industrial Plan, will also drive clean energy investments. Swedish bank SEB estimates that transition investment will be more than US$600bn in 2023 and more than US$1trn by 2025.
Moody’s is forecasting that green bond issuance will rebound to US$550bn, which would be a 14% increase on US$482bn in 2022 as firms implement net-zero strategies with increasingly diverse use of proceeds, including water, adaptation, nature and biodiversity, in addition to climate mitigation.
In other "use of proceeds" categories, Moody’s expects social bond volume to drop by around 8% to US$150bn this year after a 22% drop to US$163bn in 2022. The ratings agency is, however, forecasting a 21% increase in sustainable bonds (a mix of green and social) to US$175bn, up from US$144bn in 2022 as the interplay between environmental and social increases.
As more issuers finance their net zero commitments and transform business strategies to adapt to rising policy and market risks, ESG-labelled bond issuance from companies in high-emitting sectors with longer-term transition stories, such as aviation, shipping, cement and steel, is expected to rise this year.
"As companies start to go faster down transition pathways there could be a growing opportunity for the very highly exposed transition sectors to become a larger part of the ESG bond market," Kuchtyak said.
SLB slowdown
Despite these drivers of growth, greater market scrutiny and greenwashing fears may dampen near-term growth, particularly for sustainability-linked bonds, as issuers become less willing to enter a market where heightened scrutiny could incur reputational damage.
SLB issuance fell in the second half of last year as investors debated the relevance, ambition and rigour of issuers KPI targets and financial penalties, and volume closed the year at US$72bn.
Moody’s is expecting SLB volume to remain largely flat with a small increase to US$75bn as growth remains subdued as the market matures and focuses on establishing best practice.
"We saw quite a bit of increased scrutiny from the market on targets and I think some issuers have paused and are thinking about how to enter the SLB space. We're also seeing more focus on the materiality of the financial penalties," Kuchtyak said.
The slowdown was particularly pronounced in the US, where the share of sustainable bonds has been falling in recent years, despite the size of US capital markets. Despite a modest increase from US municipal and financial institutions, corporate ESG-labelled bond issuance of US$127bn was 32% lower year-on-year and made up only 15% of global issuance.
"It’s possible that the pushback against ESG in some parts of the US market is causing issuers to pause and reconsider their plans," Kuchtyak said.
Public-sector issuers, particularly in emerging markets, will continue to expand the ESG-labelled bond market and diversify use of proceeds as energy security, climate adaptation, blended finance and just transition climb the agenda.