Green bonds are set to drive corporate ESG debt out of slump in 2023: Barclays

GLOBAL sales of corporate bonds with environmental, social and governance (ESG) targets will rebound this year and top US$460 billion, reversing last year’s setback that came on the back of higher interest rates, Barclays said.

ESG bond volumes swelled over the past few years, but dropped by 22 per cent in 2022 amid a broader slowdown in corporate bond issues. Companies faced significantly higher borrowing costs due to aggressive monetary tightening actions by global central banks, in a bid to fight inflation.

Barclays said that corporate ESG bond issuance fell to US$362 billion last year from US$461 billion a year earlier. It expected ESG bond sales to grow by 30 per cent this year, and rebound to almost the same levels as in 2021. This would be predominantly driven by green bonds, the bank added.

Charlotte Edwards, head of ESG fixed income, currency and commodities research at Barclays, said: “We expect green bond issuance to continue to dominate the market, thanks to strong demand and a long list of green projects that need funding as companies put decarbonisation plans into action.”

Shifting the planet’s energy system away from fuels that emit greenhouse gases will cost US$2 trillion a year by 2030, according to estimates from the International Energy Agency. Companies and banks have crafted new instruments to help fund the transition.

Among ESG debt options, green bonds’ dominance has yet to be challenged by sustainability-linked bonds, a newer instrument that carries penalties for borrowers if they fail to meet certain targets.

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Barclays said that companies can secure cheaper financing through green bonds, and their relative appeal has increased even further as investors doubted the key performance indicators (KPIs) used in the less mature sustainability-linked securities.

“Volumes may have been stunted by concerns from investors around greenwashing in the market (due to concerns around unambitious targets, immaterial KPIs and small penalties),” Edwards said.

Issuance of sustainability-linked bonds declined sharply to US$60 billion from US$95 billion in 2021. REUTERS