Clearer signals from policymakers regarding the rules for ESG funds and hopes that the cycle of rising interest rates in many countries is about to end are behind the increase in global green bond issuance in the first half of 2023, asset managers said.
During the first half of 2023, green bond issuance totaled $267.1 billion, an 18% increase over the same period last year, and the strongest half for green bond issuance. green bonds since records began in 2015, according to LSEG Deals Intelligence.
Green bond proceeds during the second quarter of 2023 increased 9% from the first quarter of the year and marked the second consecutive quarter to surpass an all-time quarterly issuance record.
The green bond landscape transformed
While at 484 the actual number of green bonds issued during the first half of 2023 was down 10% from a year ago, fund companies that launched green bond funds during this period said they were waiting for better conditions.
Janus Henderson launched its Sustainable Credit fund in February. Explaining the move, portfolio manager Shan Kwee said that, with the exception of the swings caused by Silicon Valley Bank and Credit Suisse in March, “this year has offered issuers more stability in the funding environment, central banks having slowed or interrupted their tightening cycle.
“As issuers and investors move towards their own sustainability goals and the transition to net zero emissions, we can see the appeal of investing in fixed rate securities, which offer attractive returns for investors aware of the use of products to combat climate change,” he said. .
BNY Mellon initially designed its Responsible Horizons Emerging Market Debt Impact fund in 2017 – but didn’t launch it until January 2023.
Fund manager Simon Cooke said: “Even three years ago we couldn’t launch it. The universe of impact bonds – whose products are intended for specific environmental and/or social projects – represented less than $100 billion. ESG data covered only 50-60% of the universe, and interest from issuers and investors was limited.
However, by the start of 2023, things had changed beyond recognition. The impact bond universe was over $250 billion. ESG data covered more than 90% of the universe, and interest from issuers and investors was strong and growing rapidly.
“Eight months into our fund, and each of these trends has only gotten stronger,” Cooke said.
The universe of impact bonds has grown by more than $50 billion this year alone to reach more than $300 billion, he noted, from more than 300 issuers in 40 countries, according to figures from BNY Mellon.
“There aren’t many asset classes that triple in size in three years,” Cooke said, “especially those that offer such attractive financial returns as well as the ability to support real environmental or social outcomes, tangible and measurable in [emerging markets] which encompasses 85% of the world’s population and 77% of its land mass.
Release from rising rates
Fatima Luis, senior fixed income portfolio manager at Mirabaud Asset Management, said bond issuance has generally been much stronger in the first half of this year than in 2022, which had seen demand weakened by rising bond rates. interest and high inflation in most major economies.
“With the outlook for inflation to stabilize and the end of the interest rate hike cycle, demand for corporate bonds, including green bonds, is strong,” she said.
Financing the transition to a greener economy remains at the heart of the concerns of many stakeholders, notably governments, as shown by the EU Green Deal, as well as investors.
“We found that the majority of green bond issuance in the first half of 2023 came from sovereign issuers such as Germany and Italy, as well as banks, two crucial sectors for financing the European Green Deal and the transition towards a greener economy. ” said Luis.
Clarity around standards and regulation globally, but in the EU in particular, will add more transparency to issuers as well as green bond investors, she predicts.
For example, the adoption next year of the new European standard on green bonds will facilitate the assessment and monitoring of the use of proceeds from a green bond issuance, as well as the assessment of alignment with the EU taxonomic classification system, which defines a sustainable or green activity. .
Although net inflows into sustainable bond funds slowed in the challenging market environment of 2022, they remained positive. In contrast, traditional bond funds saw massive outflows during the same period.
ESG regulatory support
Eric Pedersen, head of responsible investments at Nordea Asset Management, said he sees the market for green bonds and other sustainability-themed bond categories as being strongly driven by regulatory support – particularly in Europe – as well as demand from institutional asset owners around the world with various types. ESG commitments.
On the retail and private banking side, demand comes from the implementation of the Sustainable Financial Disclosure Regulation (SFDR) and related regulations – notably the sustainability update of Mifid, a he declared.
“The full implementation of the SFDR and Mifid sustainability criteria has been delayed by the financial shocks of 2022 and, as the market returns to work on this, we expect demand for green bonds to of these market segments is growing further,” Pedersen said.
“Meanwhile, on the emitter side, the general urgency to increase the funding available to combat climate change should enable a steady stream of new emissions, whether to capture a ‘greenium’, for reporting purposes, or a combination of both.”
Companies around the world are aligning with net-zero emissions targets in an effort to sustain their market share. Daniel Babington, portfolio manager at TAM Asset Management, said green bonds have proven “a fantastic way” to finance decarbonisation projects and push companies towards their targets.
“However, the return of bonds has not fueled the entire labeled bond market, with green bonds being the only one to show positive year-on-year growth,” he stressed.
Emerging Markets
BNY’s Simon Cooke is “unequivocally positive” on the prospects for the impact of bond issuance in emerging markets and highlighted that the impact of bond issuance represents more than 25% of total corporate supply in emerging markets. emerging markets since the start of 2022, more than any other asset class.
There has been, he said, “a huge improvement in standards”, with impact bonds having met BNY Mellon’s impact assessment increasing from 50% historically to 75% today, in line with emissions in developed markets.
Emerging markets have moved from a laggard in impact bond issuance to a driver of innovation, Cooke said, with the world’s first tradable blue bond, targeting sustainable maritime vessels; the world’s first tradable gender equality bond, providing financing to women-led SMEs; and the world’s first tradable biodiversity bond, targeting forest protection.
“All of this is coming from emerging markets, and there’s still a lot to come,” Cooke said.
Clearer signals from policymakers regarding the rules for ESG funds and hopes that the cycle of rising interest rates in many countries is about to end are behind the increase in global green bond issuance in the first half of 2023, asset managers said.
During the first half of 2023, green bond issuance totaled $267.1 billion, an 18% increase over the same period last year, and the strongest half for green bond issuance. green bonds since records began in 2015, according to LSEG Deals Intelligence.
Green bond proceeds during the second quarter of 2023 increased 9% from the first quarter of the year and marked the second consecutive quarter to surpass an all-time quarterly issuance record.
The green bond landscape transformed
While at 484 the actual number of green bonds issued during the first half of 2023 was down 10% from a year ago, fund companies that launched green bond funds during this period said they were waiting for better conditions.
Janus Henderson launched its Sustainable Credit fund in February. Explaining the move, portfolio manager Shan Kwee said that, with the exception of the swings caused by Silicon Valley Bank and Credit Suisse in March, “this year has offered issuers more stability in the funding environment, central banks having slowed or interrupted their tightening cycle.
“As issuers and investors move towards their own sustainability goals and the transition to net zero emissions, we can see the appeal of investing in fixed rate securities, which offer attractive returns for investors aware of the use of products to combat climate change,” he said. .
BNY Mellon initially designed its Responsible Horizons Emerging Market Debt Impact fund in 2017 – but didn’t launch it until January 2023.
Fund manager Simon Cooke said: “Even three years ago we couldn’t launch it. The universe of impact bonds – whose products are intended for specific environmental and/or social projects – represented less than $100 billion. ESG data covered only 50-60% of the universe, and interest from issuers and investors was limited.
However, by the start of 2023, things had changed beyond recognition. The impact bond universe was over $250 billion. ESG data covered more than 90% of the universe, and interest from issuers and investors was strong and growing rapidly.
“Eight months into our fund, and each of these trends has only gotten stronger,” Cooke said.
The universe of impact bonds has grown by more than $50 billion this year alone to reach more than $300 billion, he noted, from more than 300 issuers in 40 countries, according to figures from BNY Mellon.
“There aren’t many asset classes that triple in size in three years,” Cooke said, “especially those that offer such attractive financial returns as well as the ability to support real environmental or social outcomes, tangible and measurable in [emerging markets] which encompasses 85% of the world’s population and 77% of its land mass.
Release from rising rates
Fatima Luis, senior fixed income portfolio manager at Mirabaud Asset Management, said bond issuance has generally been much stronger in the first half of this year than in 2022, which had seen demand weakened by rising bond rates. interest and high inflation in most major economies.
“With the outlook for inflation to stabilize and the end of the interest rate hike cycle, demand for corporate bonds, including green bonds, is strong,” she said.
Financing the transition to a greener economy remains at the heart of the concerns of many stakeholders, notably governments, as shown by the EU Green Deal, as well as investors.
“We found that the majority of green bond issuance in the first half of 2023 came from sovereign issuers such as Germany and Italy, as well as banks, two crucial sectors for financing the European Green Deal and the transition towards a greener economy. ” said Luis.
Clarity around standards and regulation globally, but in the EU in particular, will add more transparency to issuers as well as green bond investors, she predicts.
For example, the adoption next year of the new European standard on green bonds will facilitate the assessment and monitoring of the use of proceeds from a green bond issuance, as well as the assessment of alignment with the EU taxonomic classification system, which defines a sustainable or green activity. .
Although net inflows into sustainable bond funds slowed in the challenging market environment of 2022, they remained positive. In contrast, traditional bond funds saw massive outflows during the same period.
ESG regulatory support
Eric Pedersen, head of responsible investments at Nordea Asset Management, said he sees the market for green bonds and other sustainability-themed bond categories as being strongly driven by regulatory support – particularly in Europe – as well as demand from institutional asset owners around the world with various types. ESG commitments.
On the retail and private banking side, demand comes from the implementation of the Sustainable Financial Disclosure Regulation (SFDR) and related regulations – notably the sustainability update of Mifid, a he declared.
“The full implementation of the SFDR and Mifid sustainability criteria has been delayed by the financial shocks of 2022 and, as the market returns to work on this, we expect demand for green bonds to of these market segments is growing further,” Pedersen said.
“Meanwhile, on the emitter side, the general urgency to increase the funding available to combat climate change should enable a steady stream of new emissions, whether to capture a ‘greenium’, for reporting purposes, or a combination of both.”
Companies around the world are aligning with net-zero emissions targets in an effort to sustain their market share. Daniel Babington, portfolio manager at TAM Asset Management, said green bonds have proven “a fantastic way” to finance decarbonisation projects and push companies towards their targets.
“However, the return of bonds has not fueled the entire labeled bond market, with green bonds being the only one to show positive year-on-year growth,” he stressed.
Emerging Markets
BNY’s Simon Cooke is “unequivocally positive” on the prospects for the impact of bond issuance in emerging markets and highlighted that the impact of bond issuance represents more than 25% of total corporate supply in emerging markets. emerging markets since the start of 2022, more than any other asset class.
There has been, he said, “a huge improvement in standards”, with impact bonds having met BNY Mellon’s impact assessment increasing from 50% historically to 75% today, in line with emissions in developed markets.
Emerging markets have moved from a laggard in impact bond issuance to a driver of innovation, Cooke said, with the world’s first tradable blue bond, targeting sustainable maritime vessels; the world’s first tradable gender equality bond, providing financing to women-led SMEs; and the world’s first tradable biodiversity bond, targeting forest protection.
“All of this is coming from emerging markets, and there’s still a lot to come,” Cooke said.
