Green bond market stalled in 2022 as challenging economic conditions hampered growth
The latest data from the Climate Bonds Initiative has revealed that the previous decade of exponential growth in the green bonds market hit a major hurdle last year, falling short of the record issuance figures set in 2021. As we previously noted, the term ‘green bond’ refers to a product which is not dissimilar to traditional bonds. They work in much the same way, except for one key difference: the money raised from investors in green bonds is used exclusively to finance projects that have a positive environmental impact- such as renewable energy and green buildings. The concept of green bonds has been with us since the start of the century; in 2007, we witnessed the issuance of the world’s first green bond by the European Investment Bank (the EU’s lending arm).
The Climate Bonds Initiative reports that last year saw a total of $863.4 billion Green, Social, Sustainability, Sustainability-linked and Transition bonds (GSS+) issued, well shy of their forecast for $1 trillion per annum from 2022 onwards[i]. For reference, 2021 saw the milestone figure of $1 trillion in cumulative bond issuance reached and growth rates surpassed 50% each year between 2016-2021. Of the total GSS+ bonds issued, green bonds continued to account for more than half their worth; the worth being $487.1 billion in 2022.
Macroeconomic factors see Y-o-Y volumes fall for the first time in a decade, but the outlook for 2023 remains positive
The unexpectedly lower bond figures have been attributed to a more general decline in bond issuance throughout major markets, with volumes falling year on year for the first time in a decade: “Lenders were left reluctant to lock-in high-credit rates as the fixed-income landscape shifted, squeezing supply that historically has been outstripped by heavy investor demand.”[ii] Even so, GSS+ volumes maintained their 5% share of the global bond market.
The CBI predicts a strong year for green bonds, with Sean Kidney, CEO stating: “We are making progress: half the world’s bond-issuing countries are now issuing green bonds to finance climate action; and strong 2030-focussed action is finally being taken by the US, the EU, India, China and Japan.[iii]” He added: “We expect 2023 to be a stellar year for both green bond issuance and for climate action on the ground.”[iv] He partly attributed this to the continued development of net-zero targets for mid-century, which now cover 91% of global GDP. Further, we are increasingly seeing targets backed up with plans for 2030, thus requiring increased green investment in the near term.
A first for India with the launch of its sovereign ‘green bonds’
The new year has already seen positivity in the green bonds space, with India raising $1 billion from its maiden sovereign bonds sale. It’s reported that the Indian government sold Rs80bn ($1 billion) worth of both 5 and 10-year debt, achieving a lower borrowing cost than it would for a conventional bond of similar maturity. The 10-year bond was priced at a coupon of 7.29 per cent, which was 0.06 percentage points lower than comparable sovereign debt[v]. The country, which has a population of 1.4 billion, is on course to overtake China as the world’s most populous country this year and is currently the world’s third-largest emitter of greenhouse gases. The Indian government has committed to cutting the emissions intensity of GDP by 45% by 2030. They have also said it plans to use proceeds from the bonds for new projects such as clean transport, water and waste management, pollution prevention and control, and improving biodiversity.
Ranajoy Basu, the head of the India practice at law firm McDermott Will & Emery, was quoted by the Financial Times as saying: “India is poised to be one of the largest markets for renewable energy, so we would expect asset managers to be attracted to these green bonds.”, he added: “This should be seen as a welcome move by the Indian government.”[vi]
Looking ahead, the Indian government scheduled a similar bond offering for the 9th February and hopes to raise a total of Rs160bn for the year ($1.9 billion)
[i] Green Finance on the Rise: Green Bonds Surpass $500 Billion Annually for the First Time | Zero Carbon Academy
[ii] Green and other Labelled Bonds Held Market Share in 2022 Amidst Fall of Global Fixed-Income | Climate Bonds Initiative
[iii] Green and other Labelled Bonds Held Market Share in 2022 Amidst Fall of Global Fixed-Income | Climate Bonds Initiative
[v]India raises $1bn from maiden green bond sale | Financial Times (ft.com)
[vi] India raises $1bn from maiden green bond sale | Financial Times (ft.com)
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