Recovery in ESG bond issuance seen in 2023 as rates stabilise, inflation subsides

ISSUANCE volumes of environmental, social and governance (ESG) bonds are set to recover in 2023 as interest rates stabilise and inflation subsides, market analysts told The Business Times.

This would be a welcome change for the sustainable finance industry. Global ESG bond proceeds declined 26.4 per cent year on year (yoy) to US$699.1 billion in the Jan 1 to Dec 9, 2022 period, according to Refinitiv data. The number of ESG bonds in that period fell to 1,549 from 1,764. For the whole of 2021, global ESG bonds raised US$953.2 billion.

The amount raised from ESG bonds in South-east Asia bucked the global trend, growing by 36.9 per cent yoy to US$21.6 billion in the Jan 1 to Dec 9, 2022 period – above the 2021 total of US$15.7 billion.

ESG loan activity slowed globally and in South-east Asia. Worldwide ESG loan volumes shrank 10.9 per cent to S$572.9 billion in that period from a year-ago figure of US$642.4 billion. In South-east Asia, ESG loan amounts dropped 29.2 per cent to US$17.8 billion from US$25.2 billion.

Nneka Chike-Obi, head of ESG ratings and research for Asia-Pacific at Sustainable Fitch, attributed the region’s strength to several large US dollar-denominated sovereign offerings by countries in the Asean bloc in 2022. These included a US$1.5 billion green bond by Indonesia in May and two sustainability bonds by the Philippines that raised US$3.75 billion in total in March and October. Singapore’s first sovereign green bond added S$2.4 billion in August, and the Singapore dollar has held up relatively well against the US dollar.

Kristian Atkinson, portfolio manager of Fidelity International, said the South-east Asian outperformance reflects a maturing of the regional market: “As standards have converged towards best practice, green bond investors have felt more comfortable participating in green bonds issued out of Asean.”

Unfriendly rates

Andrew Wong, credit analyst at OCBC, said rising interest rates and global recessionary concerns increased financing costs and created a gap between what investors were willing to accept and what issuers and borrowers were willing to pay, for new bonds and loans in 2022.

“These financing and recession concerns, along with energy security and geopolitical influences, may have somewhat overshadowed or sidetracked the growth in sustainable finance seen in previous years,” he said.

A strong US dollar in 2022 also explained the larger drop in value, as local currency issuances represented fewer dollars than they did in 2021, noted Chike-Obi of Sustainable Fitch.

“The fall in ESG-labelled issuance is driven primarily by macroeconomic and market conditions, rather than anything specific to ESG,” she said.

Fidelity’s Atkinson did not view the slight underperformance of ESG issuance as material, and noted that drops in social and sustainability bond proceeds were also partly a result of Covid-19 programmes winding down. There was also weak buy interest for deals from real estate companies – which were previously heavy issuers in green bond markets – due to property valuations being impacted by rising rates as well as relatively high leverage and weak technicals.

Demand in waiting

The underlying fundamentals could help ESG issuance bounce back when inflation cools and interest rates calm down.

Atkinson saw opportunities for high-yield issuers to return after having been shut out in 2022.

OCBC’s Wong expects additional demand to come from governments and corporates having to meet their interim 2030 and 2050 net-zero commitments.

For South-east Asia, Chike-Obi expects updates of the Asean taxonomy and country-level policies in Malaysia to spur corporate issuance.

Recently announced Just Energy Transition Partnership agreements between G7 countries and Indonesia as well as Vietnam – which aim to help developing economies transition away from coal through a mix of public and private finance – may also boost sustainable finance activity in the region through catalysing private sector investments, she added.

More social, transition financing in 2023

Atkinson expects environmental bonds, including climate and biodiversity-related deals, to remain the main source of ESG issuance in 2023. He believes there is scope for the Chinese market to grow rapidly in green bonds, particularly with standards having converged towards internationally recognised principles.

Chike-Obi said that there is upside potential for social and sustainability deals as ESG investing looks beyond climate change.

“For emerging markets issuers, particularly sovereigns, sub-sovereigns, and supranationals, many of their financing requirements are already aligned to the social elements of the United Nations Sustainable Development Goals,” she said. “We have also seen more social bond fund launches in 2022 from asset managers including NN Investment Partners and Franklin Templeton.”

Proceeds raised from 17 sustainability bonds in South-east Asia in the year-to-Dec 9, 2022 came to US$9.2 billion – more than double the US$4.5 billion raised from 15 of such bonds a year ago. Regional social bonds raised US$2.9 billion from seven issuances, more than twice the US$1.3 billion from three deals the year before.

Atkinson expects more transition financing in 2023. This could come in various labels, including green or sustainability-linked bonds.

“This should favour Asian issuers, who on average have lagged behind global leaders, and will benefit from a focus on hard-to-abate sectors,” he added.