The global sustainability bond market is expected to rebound in sales this year, after falling last year amid deteriorating credit conditions.
Sales of these bonds – green, social, sustainable and sustainability-related – are expected to reach $900 billion to $1 billion in 2023, which would place them just behind the sales levels seen in 2021, according to a recent report by S&P Global Ratings. This comes after sales hit a record high of $1.06 billion in 2021, before dropping to just over $850 billion in 2022.
Sustainability Bonds
As sales potentially rebound, eyes will be on one specific type of sustainability bond – sustainability-linked bonds, according to the report. Relatively new bonds were on track for the first half of 2022 to surpass their already rapidly growing levels seen in 2021, although they closed the year lower, at $70.5 billion from $94.4 billion. billion, according to S&P data.
Sales of sustainability bonds nearly exploded in 2021 – sales in 2020 were just $8.8 billion and $4.5 billion in 2019. These bonds have appealed to investors as a way to encourage the companies that issue them to improve their sustainability practices, and therefore pay lower rates to bondholders.
The decline this subset of sustainable bonds experienced last year was almost certainly a symptom of credit conditions that have largely affected the bond market. However, sustainability bonds have come under scrutiny as questions have arisen about the objectives their issuers have set and their effectiveness in improving sustainability. These bonds, unlike use-of-product bonds, have flexible terms that vary depending on whether companies meet or fail the goals set at issuance.
“To return to growth in 2023 and beyond, sustainability bond (SLB) issuers will need to find ways to address concerns reported by market participants about the credibility of SLBs, namely the ambitions of emitters and incentives to achieve sustainability goals,” the report says.
Obligations of use of the product
Traditional product use obligations will be the main driver of sales this year, according to the report. These bonds, which require issuers to use the proceeds to finance projects, include green bonds, social bonds and sustainability bonds. Green bonds accounted for more than half of all sustainable bond sales last year and are poised to continue their strong sales as companies seek to fund net zero liabilities, according to S&P.
Social bonds accounted for less than 20% of total sustainability bond sales in 2022, but saw strong growth in 2020 and 2021 amid Covid. Issuance of such bonds has declined and may continue to do so this year as demand for pandemic relief funds has declined, the report noted. However, the growing need for affordable housing could contribute to some growth in social obligations.
This need will also help fuel the issuance of sustainable bonds, which address both social and environmental concerns, according to S&P.
“Issuers in the public housing sector can seek to develop green social housing options. Banks, additionally, could seek to combine access to affordable finance with existing green lending initiatives,” the report says. “In addition, public finance and supranational entities can turn to the sustainable bond market to finance more environmentally friendly social infrastructure such as schools, municipal buildings, hospitals, roads and energy. “
