Green bond issuance has surged this year, with China leading the way as investors embrace sustainability-linked bonds.
More than 835 bonds have raised $245bn (£204bn) since the start of the year, according to law firm Linklaters, which advises on green bond issues.
This follows a record year for green bonds in 2021, when issuance more than doubled from the previous year as economies recovered from the pandemic.
China has continued to dominate the global green bonds market in the first half of the year, to issue 206 green bonds raising $59bn and cornering a quarter of the market.
In Europe, Germany is the top issuer, raising $29bn, followed by France and the Netherlands.
The rise of sustainability-linked bonds
While green bonds remain the dominant sustainable bond category, sustainability-linked bonds (SLBs) have seen the most rapid growth, increasing 10-fold between 2020 and 2021.
SLBs link ESG factors to financial performance through KPIs and science-based targets, Linklaters said. These bonds are newcomers to the market, first issued in 2019, but are attracting attention as companies try to deal with increased obligations in terms of reporting and due diligence.
See also: – Sustainability-linked bonds: A new platform for greenwashing?
The growth of the SLB market has continued into 2022, with $26bn raised globally in Q1 and $27bn in Q2. Europe dominates the market with more than half of all SLBs issued in 2021 and the first half of this year. The continent is now the largest sustainable bond market in the world.
Financing a low-carbon transition
Since 2021, governments and the utilities and financial services sectors have accounted for the majority of green bond issuance. However, SLBs are being issued across a more diverse range of sectors, said Linklaters.
While utilities and finance account for around 30% of SLB issuance, industrials, materials and consumer comprised almost 50%. This suggests that companies in a wider range of sectors are using these bonds to help finance their net-zero or low-carbon transitions.
“Despite a slightly slower start to the year for green and social bonds compared to this time in 2021, the sustainable bond market is still going from strength to strength as investors continue to align their investment strategies to a more sustainable future,” said Amrita Ahluwalia, managing associate at Linklaters.
“Climate is still very much at the top of the agenda as the pressure mounts on corporates and the financial sector alike to ‘walk the talk’ on their climate pledges, while a matrix of developments within Europe, such as the Green Taxonomy, SFDR, progressive rules on disclosures for corporates and the “Fit for 55” package, is giving great confidence to investment.
“While the appetite for ESG financial products shows no signs of abating, concerns about potential greenwashing continues to heighten, highlighting the importance of trust in the market for green products. The sustainable bond market is one area that remains under increased scrutiny around the mis-selling of “green” investment, with the proposal of the EU Green Bond Standard in Europe, and similar being considered in other jurisdictions, holding players in the market to account.”
“Putting their money where their mouth is”
Kate Elliot, head of research at Rathbone Greenbank Investments, said the International Energy Agency has estimated the world must invest the equivalent of 1.5% of global GDP each year to reach net zero by 2050.
“A lot of that will come from public financing, but increased flows of private investment will also need to be seen and green bonds are an important part of facilitating that flow of capital from investors.”
She said the benefit of sustainability-linked bonds is that, for borrowers, they can lower the cost of capital linked to a “proactive stance” on sustainability issues. issuers also gain a reputational benefit by demonstrating commitment to sustainability, “effectively putting their money where their mouth is on sustainability”.
“For responsible and sustainable investors, the argument in favour of these types of instruments is similar to that in favour of linking executive pay to sustainability metrics – that individuals and companies are fundamentally motivated by the bottom line and placing a direct monetary benefit on the achievement of sustainability goals incentivises progress towards them,” Elliot added.
“Arguably such mechanisms provide an element of protection against sustainability ‘mission drift’ should a key person responsible for driving the sustainability strategy leave an organisation. It can also enable lenders to more directly price in the cost of potential ESG-related risks.”
