Resilience, SLB standards, sovereign issuance and transition tipping point all in the mix for 2023
Climate Bonds’ Market Intelligence has revealed that green, social, sustainability, sustainability and transition (GSS+) bond issuance has retained its market share despite a difficult year for fixed income markets, in during which GSS+ volumes fell year-over-year for the first time in a decade.
In 2021, the share of GSS+ issuance reached record volumes of over $1 trillion and held a 5% share of the global bond market. However, the difficult macroeconomic factors observed in 2022 contributed to a decline in the volume of debt in all areas. In 2022, GSS+ issuances maintained their 5% share of the global bond market despite challenging terrain that saw volumes plummet to $863.4 billion.
Green bond issuance accounted for just over half of labeled issuance in 2022, with $487.1 billion issued. Sustainability bonds contributed $166.4 billion, social bonds $130.2 billion, SLBs $76.3 billion, and transition bonds just $3.5 billion.
Lifetime GSS+ volumes had exceeded $3.7 billion by the end of 2022.
Historically, the demand for green investments has exceeded their supply. This intensified in 2022 as lenders were reluctant to maintain high lending rates in a challenging macroeconomic landscape.
However, the appeal of GSS+ bonds shone through a hazy fixed income landscape. We anticipate what we can expect from sustainable finance in 2023. Here are 5 developments not to miss:
- Rise of Resilience Investments – Another Path to $5 Trillion by 2025?
Over $2 trillion of green bonds have been issued to date and this number has the potential to reach our target of $5 trillion per year by 2025.
A demand that greatly exceeds supply remains a major obstacle to achieving this objective. There is a tremendous opportunity to harness this demand by increasing capital flows into resilience investments.
By providing the market with clear definitions and sets of rules, the current universe of green investments can be broadened to include those that build resilience.
This expansion will go beyond investments that reduce the direct physical impacts of extreme weather and will include investments that address the underlying vulnerability of people and ecosystems to climate change.
Last year, Climate Bonds set out three goals for the global resilience agenda:
identify credible, science-based investment opportunities that build resilience,
mobilize finance for credible resilience measures, and
Accelerate the speed and growth of resilience investments through an enabling policy and regulatory environment.
In 2023, we aim to support early green investments in resilience, unlocking additional climate capital that has been set aside by scarcity of supply.
- Rigor in the SLB market – Climate Bonds Certification
Sustainability Linked Bonds (SLBs) have emerged on the sustainable finance scene in recent years. At the end of 2022, Climate Bonds recorded lifetime SLB market volumes of USD$204.1.
SLB’s popularity is due to the innovative investment structure that offers investors a real impact on climate performance at the enterprise level.
However, as with all the early years of the new thematic instruments, legitimate concerns about ‘greenwashing’ have been raised due to the varying levels of ambition of the KPIs at the heart of the SLB issuance.
Climate Bonds’ upcoming expansion of its standards and certification system to SLBs in early 2023 aims to address this issue. These efforts will bring rigor to the market and signal to potential investors and regulators which SLBs meet best practice against an internationally recognized standard.
Expect the world’s first climate bond-certified SLB to appear later in 2023. This will be a catalytic moment for SLB’s credibility and lay another foundation for future market growth on the 2025 target. $5 trillion in sustainable investments per year.
- Government support for green industry is increasing
From the pain of the pandemic, the instability of soaring inflation, to the financial sting felt on energy security, it’s clear the world feels it has a lot to recover. A trend seen among global policymakers is that climate considerations must take center stage in these recoveries.
The climate prediction group, Inevitable Policy Response (IPR) calculates the combined total of public funds now available in the United States for clean energy and climate investment through the Inflation Reduction Act (IRA), Infrastructure and Investment Jobs Act (IIJA) and the CHIPS & Science Act is nearly $1 trillion.
This is complemented by bipartisan Infrastructure Acts (BILs), which provide tax cuts and subsidies for clean energy. BILs represent a government-enabled but private sector-led tool to facilitate a new round of investment in green projects.
Across the Atlantic, Europe reacts with the President of the European Commission, Ursula von der Leyen, announcing the “Green Deal Industrial Plan” in Davos, which includes the Net Zero Industry Act. The goal is to increase funding for clean energy technologies.
Investors, get ready! Or get moving, on green and climate projects that will now attract a range of new grants, credit guarantees, tax offsets or other financial incentives.
- 2023: Transition tipping point?
It is hoped that 2023 can bring a transition tipping point, a much-needed time to green hard-to-reduce sectors and align heavy industry with global efforts towards net zero. The nascent transition bond market has lagged in volume compared to other labels, but there are signs of change.
Japan adopted the issuance of transition bonds after the Ministry of Economy, Trade and Industry (METI) issued basic guidelines on climate transition financing in May 2021. This framework led to rapid adoption of transition bonds in 2022; Japan was the source country for 21 of the 54 transition bonds recorded by Climate Bonds.
However, if other countries adopt similar frameworks that endorse credible financing for the transition, this tipping point may soon become a reality. Encouragingly, the UK FCA has commissioned a Transition Plan Task Force (TPT) to work on transition frameworks of reference which are now open for public consultation.
EU support for financing the transition with a framework of its own could contribute to concretizing the principles of the European Green Dealwhich currently vaguely nods to transition amid its climate principles.
Meanwhile, Climate Bonds is developing its own transition standards to support these efforts and inform future frameworks. The expected announcement in early 2023 will complement the upcoming SLB standards.
- Sovereign issue at full steam!
Climate Bonds called it… and countries did! By the end of 2021, we have called for the number of sovereign labeled bond issuers to double, from 20 to over 40 nations.
As CEO Sean Kidney noted in 2021: “Doubling the number of GSS sovereign issuers to forty and supporting initial transactions in emerging markets should be among the immediate climate finance goals for governments, central banks and development finance institutions.
By the end of 2022, Climate Bonds had registered GSS+ bonds from 43 sovereigns with combined volumes of $323.7 billion.
Sean noted the importance of sovereign issuance to local markets: “Green sovereign issuance sends a powerful signal of intent around climate action and sustainability to governments and regulators. It catalyses the development of the domestic market and gives impetus to institutional investors.
This momentum should continue in 2023, already Israel and India have entered the market with green bonds. Could the market reach 50 sovereign issuing countries by the end of 2023? We think so!
The last word
Stay tuned for our upcoming announcements as our transition projects and SLBs receive guidance on best practices as we launch a new climate bond standard.
We would like to thank all our readers, supporters and especially our partners for their contributions and support. Together, we can add conviction and urgency to market and policy action on climate in 2023.
Till next time,
Climate bonds
