Global trends in sustainable finance bonds
The sector continues to grow, with worldwide issuances hitting US$990 billion as at the end of November 2024
SUSTAINABLE finance bond issuance – comprising mostly green, social, sustainability, and sustainability-linked (GSSSL) bonds – continues to be on an uptrend, with global issuances hitting US$990 billion as at the end of November 2024, one of its busiest years since the inception of the market in 2007.
Growth in overall sustainable finance bond issuance is in the context of a generally buoyant issuing environment for bonds driven by investors taking advantage of higher base rates and expectations for interest rates to fall, and issuers taking advantage of tight credit spreads and a soft-landing economic scenario despite elevated geopolitical risks.
Green bonds by sovereigns
While overall global volumes are rising, trends by GSSSL issuer and issue type have remained consistent as in prior years with ongoing strong issuance of green bonds by sovereigns to address the more pressing and obvious concern of climate change.
Governments globally including supranational issuers make up almost half of global sustainable finance issuance according to Bloomberg, while green bonds contribute over half of global sustainable finance issuance in the 11 months to Nov 30, 2024.
While green bonds remain the most popular format with top issuances by value from the European Union (EU), followed by Germany and France, issuance continues to be somewhat restrained against approaching 2030 and 2050 global climate change targets.
This is due to the ongoing lack of clarity and standardisation of regulations with the EU green bond market relying on the International Capital Markets Association’s Green Bond Principles 2021 that are voluntary process guidelines for issuing green bonds with recommendations for transparency and disclosure.
A NEWSLETTER FOR YOU
Friday, 12.30 pm
ESG Insights
An exclusive weekly report on the latest environmental, social and governance issues.
To address this roadblock, the EU has introduced the European Green Bond Standard (EGBS) in December 2023 to define what constitutes “green” and to establish safeguard requirements for issuers.
This standard is expected to enhance market efficiency by minimising discrepancies and costs for investors evaluating green bonds, strengthen efforts to combat greenwashing, and promote further growth in the green bond markets.
According to comments by global law firm White & Case, the EGBS is expected to create greater stability and quality, giving EU green bond issuers and investors more confidence and helping them steer clear from greenwashing claims.
While green bond issuances in the EU could rise following the EGBS taking effect from Dec 21, 2024, this increase may be gradual as issuers adapt to the new framework. Nonetheless, it is anticipated that the new framework will encourage investor confidence in this label and lead to higher green bond issuances.
According to a report from the European Commission in July 2023, the EU’s green transition will require an additional investment of 620 billion euros (S$876.2 billion) each year until 2030. In addition, companies in various sectors will face significant expenses as they adopt more sustainable operational practices.
Sustainability bonds
While green bonds continue to garner favour within sustainable finance, other GSSSL types have also had a solid year in 2024. Sustainability bonds as the second largest GSSSL type had their busiest October ever due to strong issuance across currencies by development banks.
A total of US$24.5 billion of sustainability bonds were issued in October by governments and corporates, almost double that of the roughly US$12.3 billion issued in October 2023, according to Bloomberg.
Of this, development banks including the World Bank along with supranationals, sovereigns and agencies contributed 73 per cent of the October 2024 sustainability bond issuance, followed by industrials and financials contributing 12.1 per cent and 9 per cent respectively.
Corporates have also driven the year-on-year growth by increasing the number of eligible green or social projects within their sustainability bond frameworks over time, according to a report by Barclays.
While this has increased the flexibility of issuers to finance projects with sustainability bonds, there remain some drawbacks for investors including potential greenwashing, a lack of certainty as to what the bond proceeds will be used for and what the eventual sustainability impact of the bond will be.
Companies usually only report the use of proceeds later when they publish their sustainability or impact report.
Social bonds
Social bonds also had a constructive year. The month of April, for example, reported global social bond sales of US$14.3 billion, a new record. The previous high was US$12.2 billion in April 2022. This was driven by large deals by French unemployment insurance agency Unedic and Colombia.
Other notable social bonds were from:
• Citigroup (through Citibank), which priced US$3 billion of social bonds in November 2024. Bond proceeds are expected to be used exclusively to finance or refinance social finance assets that meet Citi’s social eligibility criteria according to its social finance framework, including expanding access to financial services to unbanked and underserved individuals and promoting affordable housing.
Citi was reportedly the only one of the six large Wall Street banks to issue a benchmark-sized sustainable finance bond in 2024, also issuing a 750 million-euro green bond in May 2024.
According to a Citi spokesperson, the US$3 billion social bond “contributes to our social finance commitment and ability to meet investor demand for sustainable finance products”.
Proceeds may also have been used to refinance the October 2024 maturity of Citi’s inaugural US$2.5 billion social bond for housing that was the largest ever social bond issued by a private sector issuer at the time and kept Citi as the largest financier of affordable housing in the US, according to Environmental Finance, an online news and analysis service.
That bond was used to finance the construction, rehabilitation and preservation of quality affordable housing for low and moderate-income populations. The bond also was part of Citi’s Action for Racial Equity plan that looked to provide more than US$1 billion to communities of colour in the US to close the racial wealth gap.
• In Europe, Deutsche Bank was a first-time issuer of social bonds raising 500 million euros in early July 2024. The deal saw strong investor demand. Proceeds will be used to refinance social assets such as provisions of adequate and affordable housing for disadvantaged populations or communities, according to the bank’s sustainable instruments framework.
The framework also aims to generate a cumulative 500 billion euros in sustainable financing and investments for the bank by the end of 2025 (excluding its investment arm DWS Group).
• In South Korea, social bond issuances account for 66 per cent of GSSSL issuances, in both US dollars and the local currency. Korea Housing Finance Corp is one of the key issuers, which facilitates the government’s policy of making home loans more accessible to low and middle-income households.
Sustainability linked bonds
Sustainability linked bonds (SLBs), however, are heading for their third straight year of noticeable decline. Investor reluctance persists around the incentive structure of the instrument, the quality or rigour of the instrument’s sustainability performance indicators (SPIs) or targets (SPTs) and the actual impact of the issuance, some of which can come from brown companies that do not disclose any specific use of proceeds, whether green, social or otherwise.
Greenwashing concerns are on both sides of the transaction with issuers also concerned about being accused of overstating the benefit of the SLBs to the environment or society, while also having difficulty deciding what is the right SPI/SPT and what is actually achievable.
A recent report from Climate Bonds Initiative highlighted that more than 80 per cent of 768 SLBs issued from 2018 through November 2023 were not aligned with global climate goals while an analysis by Bloomberg New Energy Finance reported that 16 per cent of SLBs issued up to May 2024 with a publicly available call date allow companies to call the SLB before the SPI/SPT observation date, up from 9 per cent in 2023.
Governments and regulators have also raised concerns with the Platform on Sustainable Finance that advises the European Commission on environmental, social and governance policies proposing that SLB proceeds, or sustainable flows be excluded from an EU review of sustainable flows in the region and an exercise that monitors how well the EU’s green rules are working.
This is because including SLB flows would require a detailed assessment of the materiality and ambition of SLB SPTs as opposed to green bonds that target specific projects.
As for the concern with the SLB incentive structure, this was highlighted by SLB’s more positive event of 2024, Italian vertically integrated utility Enel’s US$2 billion issuance in June that drove SLB issuance by companies and governments to US$6.6 billion that month, the highest amount since the US$7.5 billion raised in September 2023.
Demand for the deal was strong with investor orders of nearly US$11 billion, and while the company saw this as a positive sign for the market’s confidence in SLBs, the interest was likely driven by a few factors:
1. Investor familiarity with Enel as the first and largest issuer of SLBs globally, as well as the company’s commitment to sustainability.
2. The SLB market’s largest trigger event to date when Enel missed its emissions targets on roughly US$20 billion of bonds earlier in 2024 that was due to Russia’s invasion of Ukraine and the resultant European energy crisis.
3. Investor interest in the possibility of receiving higher coupons in the future if Enel misses its emissions targets again. According to Bloomberg, the missed emissions target cost the company around 83 million euros in additional interest.
At the same time, an Enel 2027 bond whose coupon was set to rise due to the missed SPT outperformed a comparable bond from the company that was not impacted by the SPT miss as investors in Enel’s SLB’s started pricing them as if the coupon was going to increase.
This last point highlights the questionable outcome of sustainable finance investors profiting from sustainable performance that is below targets.
This is notwithstanding that Enel’s emissions intensity in 2023 reportedly remained in line with the 1.5 deg C trajectory, based on the 2015 pledge by world leaders to try and prevent global temperatures rising by more than this level.
In another example from 2024, London & Quadrant Housing Trust missed a key emissions target that resulted in a coupon step-up to 2.125 per cent from 2 per cent on a 300 million-euro SLB.
As a result of this, the price of the SLB affected by the coupon step-up rose in comparison to the issuer’s other bonds.
This is an edited version of a sustainable finance special interest commentary by
Copyright SPH Media. All rights reserved.
