Sales of sustainable bonds in 2022 have fallen far below market expectations, and are projected to come in at just over half the level analysts had pegged earlier this year.
That is according to an updated report issued Tuesday by S&P Global Ratings. The group revised its expectations from February, when it had anticipated global sales to surpass $1.5trn by the end of the year for green, social, sustainability and sustainability-linked bonds. It now says sales will likely end the year at $865bn, down 16% from the levels seen in 2021.
Worsening credit conditions are affecting bond sales widely. Globally, sales of all bond types are similarly down by 16%, the report noted.
However, sustainable bonds have increased as a percentage of total bond sales in recent years, rising from 5% in 2019 to 12% last year. That percentage is expected to hold steady in 2022, the report stated.
“The GSSSB [green, social, sustainability and sustainability-linked bonds] market has demonstrated resilience, despite a tough start to the year, in maintaining its share of total bond issuance in the first half. However, it has not been impervious to the same pressures on global bond issuance,” the report read. “As such, we believe that GSSSB issuance will still fall short of 2021’s exceptional levels, as inflation and interest rates continue to rise. Low refinancing needs in the near term, rising yields, and the increasing odds of recession will continue to weigh on volumes in both the overall bond and GSSSB markets.”
Europe continues to be the dominant market for sustainable bonds, accounting for 45% of sales this year, followed by Asia/Oceania at 23% and North America at 16%.
Exception to the trend
Only one type, sustainability-linked bonds, is having a banner year. Sales of those securities are up 18% year-to-date compared with this time in 2021, according to S&P. Sustainability-linked bonds represented just 1% of sustainable bond sales in 2020 but grew to account for 9% of sales in 2021 and 11% during the first six months of 2022.
Those products have also been under more scrutiny. Unlike use-of-proceeds bonds, sustainability-linked bonds are flexible, with conditions varying based on whether an issuer exceeds or fails to meet predetermined ESG objectives. That aspect, which has the potential to encourage companies to improve practices and thus pay lower rates to bond holders, has been attractive to buyers. But increasingly there have been questions about how effective those bonds are, as goals are often set surprisingly low or the terms baked into them allow issuers to buy them back before deadlines for meeting goals.
That has not been reflected in sales, and some buyers appear to be placing a premium on sustainability-linked bonds over comparable ones that lack climate goals. A report this month from the Climate Bonds Initiative found that in 2021 and the first half of 2022, 14 sustainability-linked bonds in a sample of 37 had “greenium” pricing compared with bonds lacking such goals. Among those, 11 of the bonds with a greenium were in US dollars and three denominated in euros.
