Sustainable debt market shrugs off geopolitical risk, US rate rises to maintain strong growth
- Bank of America Global Research said more than US$30 billion worth of sustainability-linked bonds were issued globally in the first quarter of this year
- Sustainability-linked bonds are still new in the mainland Chinese market, with only six such bonds issued onshore last year, according to Refinitiv
Sustainable finance deals are expected to continue their galloping growth this year and beyond as the trend for companies to set environmental targets and investors’ appetite for such projects remain healthy, according to bankers.
Standard Chartered Bank forecasts that global issuance of green, social, sustainability and sustainability-linked (GSSS) bonds will total US$1.7 trillion this year, representing 52 per cent year-on-year growth. Deal volume is projected to reach US$4.2 trillion in 2025, accounting for around a third of all bonds issued.
“Green bonds are likely to retain their position as the largest segment of GSSS issuance. However, we expect sustainability-linked bonds (SLBs) to be the fastest-growing segment, given the greater flexibility they offer issuers in terms of use of proceeds,” Simrin Sandhu, the bank’s executive director for credit research, said in a report.
Environmental, social and governance (ESG) investments comprise various types of bonds, but each one focuses on a specific area. For example, green bonds, social bonds and sustainability bonds raise money for specific projects with environmental benefits, while sustainability bonds cover both environmental and social issues. Sustainability-linked bonds, however, cover broader corporate-wide sustainability performance targets rather than a particular project.
Analysts say this credit instrument is gaining traction in the market. Bank of America Global Research said more than US$30 billion worth of sustainability-linked bonds were issued globally in the first quarter of this year. Standard Chartered Bank’s report noted that sustainability-linked bonds showed the strongest rate of growth among all ESG bonds, with total issuance soaring to US$109 billion in 2021, up from only US$11 billion the year before.
“The strong momentum in this segment reflects the greater flexibility offered by these instruments, allowing issuers to advance their sustainability goals without having debt issuance proceeds ring-fenced for use in a specific project,” Standard Chartered’s Sandhu said.
Despite the tighter credit environment caused by geopolitical risks and rising US interest rates, the sustainable debt market has managed to maintain its growth. In the first two months of 2022, global ESG funds saw inflows of US$6 billion compared to US$75 billion in outflows for non-ESG funds, according to the Bank of America.