Sustainable bonds worth $1 trillion could be issued this year

The global issuance of sustainable bonds is expected to reach between $900 billion and $1 trillion in 2023 driven by increased demand, energy transition efforts and climate supportive policies, a new report said.

Green, social, sustainable and sustainability-linked bonds issued this year are expected to be worth close to the $1 trillion mark reached in 2021, according to the latest report from S&P Global Ratings.

GSSSB will account for 14 per cent to 16 per cent of the total bonds issued this year, it added.

“GSSSB issuance captured almost 13 per cent of total global bond issuance from January 1 to June 30 this year and … will continue to outpace traditional bond issuance for the rest of the year – reaching its highest-ever percentage of global bond issuance,” S&P said.

Countries across the globe are enacting climate-friendly policies aiming to reduce greenhouse gas emissions, boosting demand for sustainable bonds.

Several nations have set net-zero targets and have stepped up efforts to cut emissions.

Green bond issuance in the first half of 2023 reached a record $310 billion, comprising 59 per cent of the GSSSB market in 2023 so far.

Green bonds are “likely to continue to dominate the market", while sustainability-linked bond issuance is set to decline amid “questions regarding the credibility of targets persist", the report said.

Green bonds are instruments that raise funds for projects with environmental benefits, including renewable energy, green buildings and sustainable agriculture.

S&P expects sovereign green bond issuance to "increase notably this year", with the $80 billion of issuance in the first half already crossing the full-year total for 2022.

Green bond issuance in the Middle East has also reached new highs this year, at $13 billion so far.

“This is more than the region's entire GSSSB issuance last year,” the rating agency said.

In July, Abu Dhabi clean energy company Masdar raised $750 million through the sale of 10-year senior unsecured notes to help it fund renewable energy projects. It listed its first green bond on the London Stock Exchange in August.

In April, Abu Dhabi National Energy Company, better known as Taqa, also raised an aggregate $1.5 billion through dual tranche bond issuances, including its first green bond, as it continues to invest in expansion and diversify its sources of funding.

Saudi Arabia’s Public Investment Fund also raised $5.5 billion through the sale of a green bond as the Arab world's largest economy continues to focus on building new renewable energy projects and reaching net zero by 2060.

In the Middle East, sustainable bond issuance more than tripled to reach $15.4 billion in the first half of 2023, S&P said. Most issuances involved governments as key stakeholders and were green bonds.

Three issuances by the PIF accounted for 36 per cent of the total.

"The region also benefits from continued issuances in the UAE, and new issues in Turkey and Jordan. The UAE and Saudi Arabia capture more than 80 per cent of total GSSSB issuance in the region. We expect this trend to continue into 2024," S&P said.

S&P expects to see higher volumes of sustainability-linked sukuk in the Middle East as issuers meet investor demands and core Islamic finance countries seek to reduce their carbon footprints.

"We think Cop28 in the UAE could shine a light on the opportunities offered by Islamic finance and sukuk to finance initiatives related to the climate transition," the report said.

Europe, meanwhile, will remain the leading region for GSSSBs, according to the report.

GSSSB issuance in Europe in the first half reached $269 billion, surpassing the previous first-half record of $262 billion reached in 2021 and accounting for more than 50 per cent of global issuance for the first time.

Green bond issuance pushed up the total GSSSB volume in Europe, with Germany ($15 billion), Italy ($13 billion), the UK ($10 billion), France and Austria ($6 billion each) accounting for most of the issuances in the six month period to the end of June.

“Efforts to accelerate the energy transition were the primary reason for issuance growth,” the report said.

In North America, overall issuance has contracted significantly since 2022, reaching only $55 billion so far in 2023. This is just over a third of the amount raised in 2022, and less than a third of the amount recorded in 2021.

“The decline can be attributed to a general bond market hesitancy among US investors after the fall of regional banks such as Silicon Valley Bank in March, the prolonged US debt ceiling debate and some states implementing policies that hinder supply and demand for GSSSB,” the report said.

Going forward, S&P expects GSSSB issuance to grow in 2023.

“We believe that despite potential headwinds, 2023 will be the second-largest year for GSSSB issuance, nearly reaching the high of 2021,” it said.

“Though short-term interest rates may continue to rise in many major economies, long-term rates have largely stabilised, reflecting market sentiment that inflation may soon get back under control and creating a favourable environment for increased GSSSB issuance through the end of the year.”