EM sustainable bond surge to remain intact in the longer term: Moody’s ESG Solutions
Michelle Zhu
THE recent surge in emerging market (EM) sustainable bond volumes is likely to continue in the coming years despite near-term headwinds affecting certain markets, according to Moody’s ESG Solutions.
In a report dated Jun 8, the research team noted that global issuance of green, social, sustainability and sustainability-linked (GSSS) bonds totalled US$203 billion in Q1 2022. This represents an 11 per cent decline from Q4 2021, and is 28 per cent lower year on year on the back of broader fixed income market conditions, including inflationary pressures and risks of accelerated monetary policy tightening exacerbated by the Russia-Ukraine war.
EM GSSS bond value, however, grew 22 per cent quarter on quarter, and 13 per cent on year to US$34 billion to account for 17 per cent of the global issuance observed for all of 2021.
Matthew Kuchtyak, Moody’s ESG Solutions vice-president of sustainable finance, said this represents “relative strength” in issuance following a “breakout year” for EM sustainable bond volumes in 2021, which more than doubled that of 2020.
Social bonds and sustainability bonds totalled US$1 billion and US$10 billion, respectively.
Green bonds by EM issuers remained the largest contributor to EM GSSS bond volumes and totalled US$18 billion in Q1 2022, accounting for 52 per cent of all EM GSSS bonds for the quarter but representing the lowest quarterly share on record.
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Kuchtyak sees this as a “sign of increasing diversification in the types of sustainable instruments used across the EM universe”.
He also highlighted sustainability-linked bonds’ (SLB) continued emergence as “the instrument of choice for many EM issuers”, with US$6 billion in Q1 2022 representing the second-highest quarterly issuance from this market segment to date and approximately 23 per cent of global SLB issuance in Q1 2022.
Beyond the diversification in EM sustainable bonds in terms of both label and structure, Kuchtyak believes relatively newer sustainable bond markets around the globe are increasingly complementing sustained growth in more seasoned markets such as China.
“EM volumes remained strong in Latin America at over US$11 billion, the third-highest quarterly share to date and around one-third of global EM issuance, while volumes from EM issuers in the Middle East and Africa topped US$3 billion, the largest quarterly share on record for the region,” he observed.
On the other hand, Chinese and Asia-Pacific GSSS bond issuances formed just 41 per cent and 53 per cent of total EM volumes for Q1 2022, compared with 50 per cent and 60 per cent, respectively, for all of 2021.
“Although near-term market headwinds will likely temper growth in EM volumes on a temporary basis, growth should resume over the longer term given the significant challenges faced by issuers in these markets,” wrote Kuchtyak.
This comes as issuers in markets such as Latin America, the Middle East and Africa tend to carry relatively higher exposure to environmental, social and governance (ESG) risks and have significant sustainable development needs, he said.
Noting “strong growth potential” for sustainable bonds from EM sovereigns and other public sector issuers, Kuchtyak expects EM issuers to increasingly finance their sustainable finance development needs with labelled bonds in the years to come.
“This may also serve to encourage broader sustainable bond issuance in these markets, as benchmark sovereign sustainable bonds can serve to encourage other public and private issuers to launch their own labelled transactions,” he added.
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