Clearer signals from policymakers about rules for ESG funds, and hopes the interest rate hiking cycle in many countries is about to come to an end, are behind the surge in global green bond issuance in the first half of 2023, asset managers have said.
During the first half of 2023, green bond issuance totalled US$267.1bn, an 18% increase compared to the same period a year ago, and the strongest half year for green bond issuance since records began in 2015, according to LSEG Deals Intelligence.
Green bond proceeds during the second quarter of 2023 increased 9% compared to the first quarter of the year and marked the second consecutive quarter to surpass an all-time quarterly issuance record.
Green bond landscape transformed
While at 484 the actual number of green bonds issued during the first half of 2023 was down 10% compared to a year ago, fund houses that did launch green bond funds during the period said they had been waiting for better conditions that finally came.
Janus Henderson launched its Sustainable Credit fund this February. Explaining the decision, portfolio manager Shan Kwee said, with the exception of the Silicon Valley Bank and Credit Suisse induced wobbles during March, “this year has offered issuers more stability in the funding environment as central banks have slowed or paused their tightening cycle”.
“As issuing organisations and investors progress their own sustainability targets and transition pathways to net zero we can see the attraction to investing in fixed interest, which offers attractive prevailing yields for investors with a consciousness over use of proceeds to tackle climate change,” he said.
BNY Mellon initially conceived of its Responsible Horizons Emerging Market Debt Impact fund back in 2017 – but only launched it in January 2023.
Simon Cooke, manager of the fund, said: “Even three years ago we couldn’t launch it. The impact bond universe – where proceeds are earmarked for specific environmental and / or social projects – was less than $100bn. ESG data only covered 50-60% of the universe, and issuer and investor interest was limited.”
By the start of 2023, however, things had changed beyond recognition. The impact bond universe was over $250bn. ESG data covered over 90% of the universe, and issuer and investor interest was strong and rapidly growing.
“Eight months post the launch of our fund, and each of those trends have only gotten stronger,” said Cooke.
The impact bond universe has grown by more than $50bn this year alone to over $300bn, he pointed out, from more than 300 issuers in 40 countries, according to BNY Mellon’s figures.
“There aren’t many asset classes that triple in size in three years,” Cooke said, “particularly those that offer such attractive financial returns alongside the chance to support real, tangible, measurable environmental or social outcomes in [emerging markets] that encompasses 85% of the world’s people and 77% of its land mass”.
Release from rising rates
Fatima Luis, senior fixed income portfolio manager at Mirabaud Asset Management, said bond issuance generally has been much stronger in the first half of this year as compared to 2022, which saw demand weakened by rising interest rates and high inflation in most major economies.
“With the prospects of inflation stabilising and the end of the interest rate rising cycle, demand for corporate bonds, including green bonds, is strong,” she said.
Financing the transition to a greener economy continues to be central to many stakeholders including governments, as seen with the EU Green Deal, as well as investors.
“We’ve seen the majority of green bond issuance in the first half of 2023 come from sovereign issuers such as Germany and Italy, as well as banks, two sectors crucial to the financing of the EU Green Deal and the transition to a greener economy,” said Luis.
Clarity around standards and regulation globally, but in the EU especially, will add more transparency to issuers as well as investors of green bonds, she predicts.
For example, the adoption of the new EU Green Bond Standard next year will make it easier to assess and monitor the use of proceeds of a green bond issue, and assess the alignment with the EU taxonomy classification system, which defines a sustainable or green activity.
Even though net inflows into sustainable bond funds slowed in the challenging market environment of 2022, they remained positive. By contrast, traditional bond funds experienced massive outflows during the same period.
ESG regulatory support
Eric Pedersen, head of responsible investments at Nordea Asset Management, said he is seeing the market for green and other sustainability-themed bond categories driven very much by regulatory support – especially in Europe – as well as demand from institutional asset owners globally with various types of ESG commitments.
On the retail and private banking side, demand is from the implementation of Sustainable Financial Disclosure Regulations (SFDR) and related regulation – not least the Mifid sustainability update, he said.
“Full implementation of SFDR and the Mifid sustainability criteria was delayed by the financial shocks of 2022 and as the market gets back to work on this, we expect green bond demand from these market segments will rise further,” said Pedersen.
“Meanwhile, on the issuer side, the general urgency to increase the financing available to address climate change should provide for a steady stream of new issuance, whether to capture a ‘greenium’, for signalling purposes, or a combination of the two.”
Across the globe, companies are aligning themselves with net-zero targets in a bid to future proof their market share. Daniel Babington, portfolio manager at TAM Asset Management, said green bonds have proved “a fantastic way” to finance decarbonisation projects and push companies towards their goals.
“However, the return to bonds has not fed into the whole labelled bond market with green bonds the only label posting positive year over year growth,” he pointed out.
Emerging markets
BNY’s Simon Cooke is “unequivocally positive” on the outlook for impact bond issuance in emerging markets, and pointed to impact bond issuance at more than 25% of total emerging market corporate supply since the start of 2022, higher than any other asset class.
There has been, he said, “a huge improvement in standards”, with impact bonds passing BNY Mellon’s impact assessment increasing from 50% historically to 75% today, in line with developed market issuance.
Emerging markets have moved from the laggard in impact bond issuance, to driving innovation, said Cooke, with the world’s first tradeable blue bond, targeting sustainable marine vessels; the world’s first tradeable gender equality bond, offering finance to female led SMEs; and the world’s first tradeable biodiversity bond, targeting protection of forests.
“All of these came from emerging markets, and there is much more to come,” said Cooke.
