In 2021 the green, social and sustainability (GSS) bond market grew to over EUR 1.8 trn, with the green bond market passing the symbolic EUR 1 trillion milestone in September. This growth is likely to be sustained in the year ahead, with green bond issuance rising 35% to around EUR 600 billion. This robust growth will be fuelled by EU issuance, but the US and emerging markets will also start to gain market share in green bonds in the year ahead.
Bram Bos, Lead Portfolio Manager, Green Bonds, at NN Investment Partners: “It is clear to us that the momentum of growth in GSS bonds will only accelerate further in the years ahead. This growth is both driven by demand from investors as well as from regulators and policy makers who are aiming to reach goals to lower carbon footprints. NN IP has been a frontrunner in the green bond market, offering four dedicated green bond funds.”
2021 in review
2021 saw a rising wave of demand for sustainable fixed income options. The green bond market grew EUR 440 bn to EUR 1.1 trn (as of November 2021, source Bloomberg). Social bonds also experienced strong growth, growing EUR 189 bn to EUR 370 bn (as of November 2021, source Bloomberg), while sustainability bonds (financing a combination of green and social projects) more than doubled, with an increase of EUR 162 bn to EUR 303 bn (as of November 2021, source Bloomberg).
One of the key factors supporting issuance in 2021 was the ‘bounce-back’ of issuance postponed in 2020 due to the Covid-19 pandemic and resulting disruption to bond markets. However, markets were also supported by debut sovereign green bond issuance from governments, including Italy, Spain and the UK. The introduction of the EU Taxonomy which defines clear green criteria for a number of sectors was important in encouraging investment. Perhaps most importantly, the EU began its green bond issuance to support the NextGenerationEU recovery program.
The year ahead
Bos continues: “We believe growth in 2022 will be driven by a few factors. First of all, increased implementation of regulation related to sustainable finance is a factor, which will contribute positively to GSS growth. Secondly, the EU’s green bond program which kicked off in October 2021 will be influential, as we expect issuance to be between EUR 50-EUR 75 bn from the EU. Lastly, sustainable finance is spreading to more parts of the world. In the past Europe has been the centre of the GSS market, but we expect the US and emerging markets to gain market share in 2022.”
On regulation, governments are progressively making greater commitments to better environmental practice. There are now 70 countries, accounting for two-thirds of global carbon emissions, with net-zero targets, to be met by 2050¹. COP26 introduced new targets on biodiversity, coal and methane emissions. These initiatives should all ultimately be reflected in regulatory change. Companies should expect that investors will be asking more specifically about their deforestation tracking, fossil fuel phase-out plans and exclusions.
The strongest factor in green bond markets in 2022 is likely to be EU issuance. The EU has pledged to issue up to EUR 250 billion in green bonds to support the bloc’s pandemic recovery fund. EU Green bond issuance is likely to grow next year by EUR 50-75 billion from 2021 levels (Bloomberg), but the total could well exceed this figure depending on the speed of EU issuance.
Social bond issuance is likely to increase by EUR 75 billion from 2021 issuance to EUR 250 billion in 2022 (Bloomberg). But long-term growth is likely to be constrained as without an EU Social Taxonomy, corporate issuers will struggle to define eligible uses of proceeds. This is currently only in draft form. Sustainability bond issuance is expected to grow EUR 105 billion from 2021 levels to EUR 250 billion (Bloomberg), but questions over definition are a problem here too.
A number of emerging market countries (Chile, Egypt and Indonesia) have stepped up efforts have issued green, social and sustainable bonds. With the market growing rapidly in this space, more diversification and choice is available for investors to reward those efforts.
An evolving approach
Bos says an evolving sector requires an evolving approach: “New and more detailed regulation, such as SFDR, requires the collection of more data and regular dialogue with issuers to standardise and ensure the quality of impact data that we disclose. We are innovating using technology, including artificial intelligence, to support the assessment of issuer green bond data and broader information. This helps us assess an issuer’s alignment with a 1.5C scenario and its impact across a broad range of environmental and social factors.
“Having dedicated resources who understand the policy and technical requirements for issuers and who can provide guidance to issuers on what is expected from disclosures increases the quality and transparency of analysis.”