Sustainable bond issuance will return to growth (1)
Government action, broader market uncertainty, adaptation financing and responding to credibility questions will help determine total issuance.
In our Global Credit Outlook-2023- No easy way out Report, we estimated modest growth of 2.5 per cent in global bond issuance. Below, we provide our outlook for the green, social, sustainable, and sustainability-linked bond (GSSSB) market for 2023.
In addition, we explore some of the key drivers of overall global issuance, as well as for sectors and regions.
This research draws on Environmental Finance's Bond Database of global GSSSB issuance for non-financial corporates, sovereigns, financial institutions and international public finance issuers; Bloomberg for structured finance issuers; and for US public finance issuers, we leverage our proprietary dataset that we have maintained for 10 years and which we believe best captures the nuances of the US municipal bond markets.
Our GSSSB forecasts in this research are informed by S&P Global Ratings’ global bond forecasts, issuer surveys and market intelligence gathered by our sustainable finance and credit ratings analysts. GSSSB--Green, social, sustainability, sustainability-linked bonds. Source: Environmental Finance Bond Database.
Global GSSSB issuance forecast to reach $900 billion to $1 trillion in 2023 Annual GSSSB issuance by instrument type Note: Excludes structured finance issuance. f--S&P Global Ratings forecast. GSSSB-Green, social, sustainability, sustainability-linked bonds. Sources: Environmental Finance Bond Database, S&P Global Ratings.
We believe in 2023, global GSSSB issuance will return to growth, reaching $900 billion-$1 trillion, nearing the record $1.06 trillion in 2021.
This follows a 2022 in which contractionary monetary policy and macroeconomic uncertainty pulled down global bond issuance.
Three factors could drive growth or drag it down. Broadly, these are policy initiatives, levels of investment in climate adaptation and resilience, and the ability of issuers to address concerns about the credibility of certain types of GSSSB debt.
Green bonds will likely continue to dominate. However, we expect to see sustainability bonds become more prevalent. Meanwhile, sustainability-linked bonds (SLBs) are at an inflection point.
Scepticism and questions around the credibility of the asset class’s ability to achieve meaningful sustainability targets are increasing, weighing on the minds of investors and issuers. In our view, total global bond issuance will grow only moderately in 2023.
However, we think faster growth for GSSSB issuance will lead to a larger market share for this asset class across all regions and sectors.
We believe GSSSB issuance from non-financial corporates, financial services, and the US and international public finance sectors is likely to comprise 14-16 per cent of all bond issuance in 2023
Drivers could boost or pressure issuance as always, conditions in the global bond market will underline issuance of GSSSB. With global bond issuance forecast to resume modest growth in 2023, we believe momentum is on GSSSB's side.
We have identified three key themes that we believe could determine whether GSSSB issuance hits $900 billion-$1 trillion this year: • Policy, regulation and transparency initiatives: These will influence investor demand and issuer appetite.
• Calls for investment in climate adaptation and resilience: These could spur more GSSSB issuance, particularly green and sustainability bonds, to address the growing gap between the cost of adapting to climate change and what has been invested to date.
• Sustainability-linked bonds' inflection point: If questions surrounding the credibility of these bonds are not addressed to the satisfaction of investors and other critics, this could hamper issuance in what has been a segment of growth for GSSSB. Policy, regulation and transparency initiatives should drive GSSSB issuance over time.
The impact on investor demand and issuer appetite for GSSSB from sustainability-related policies, regulations and transparency initiatives will be mixed in 2023. Development and implementation in these areas are likely to gather pace globally over the next few years.
Take the Inflation Reduction Act, which was passed in the US in August 2022.
We believe this is already driving issuance. However, EU initiatives such as the EU Taxonomy and the EU Green Bond Standard are unlikely to significantly influence issuance levels this year. This is because we think most issuers are likely to continue to follow the International Capital Market Association (ICMA) principles.
Over the next five years, regulatory initiatives could be a key driver of whether the GSSSB market grows. National directives on electric vehicles or national building standards, for example, could provide direction or signals for further sustainable finance flows.
The content of initiatives could inform corporate and government decisions on financing research and development, infrastructure projects and plants and equipment.
The Inflation Reduction Act, for instance, could further boost GSSSB issuance in the US by incentivising certain corporate behaviour. It can do so through mechanisms such as tax credits, that encourage investment in green projects, particularly in the energy sector.