As the world turns to sustainable finance to fight climate change and address the fallout from the global pandemic, we have seen first-hand the strong momentum around sustainable debt issuances in 2021, with more room for growth in 2022.
Strong year expected for green bonds, but social remains an important factor
In 2022, we expect strong investor demand and regulatory developments to help standardise the market to drive growth in sustainable debt issuances worldwide. According to our data, issuances of new green, social, sustainability and sustainability-linked (GSSS) bonds will grow 45% - in line with the growth seen over the past three years – reaching the EUR 1.2 trillion mark by the end of the year.
We believe that green bonds will maintain their position as the dominant sustainable bond category and reach record issuance volumes in 2022. If we look at the EUR 23 billion worth of new sustainable bonds listed on the Luxembourg Stock Exchange (LuxSE) and displayed on the Luxembourg Green Exchange (LGX) in January 2022, green bonds represented more than half of the new GSSS bonds added in terms of number and 40% of the total amount raised by these sustainable debt securities. Sustainability bonds, on the other hand, which raise funding for green and social projects, make up 35% of the new GSSS bonds on LGX in terms of number and 50% of the amount raised by these GSSS bonds in the same period. This clearly indicates that the social dimension remains an important factor in the sustainable finance market at the start of 2022. Even though total sustainable bond issuance still makes up a relatively small part of total global bond issuance, we estimate that this market segment will continue to grow in 2022.
Global sustainable bond issuances in EUR by year of issuance (Source: LGX DataHub)
An increased focus on SLBs
In 2021, we saw the sustainability-linked bonds (SLB) market gaining traction with EUR 91 billion worth of SLBs issued in 2021, representing a tenfold increase from 2020 (EUR 8.5 billion)*. Our data shows that SLBs now represent almost 5% of the overall GSSS bond market, with a clear upward trajectory. We predict that the SLB market segment will be the one to grow the fastest of the GSSS bond categories in 2022, as the issuer pool continues to diversify across geographies, sectors, and entity sizes, due to the increasing importance of transition financing. The figures gathered in the LGX DataHub indicate that 89%* of SLBs are issued by corporates.
Evolution of SLB issuances, from January 2019 to December 2021*
Distribution of currencies represented in the SLB universe*
However, at COP26, the UN strongly advised countries to submit short and medium-term targets for their decarbonisation efforts. We believe that this may spark the issuance of sovereign SLBs in 2022, which offer sovereign issuers a new way to show the market their commitment towards climate-related targets and societal objectives. Our experience at LGX tells us that other public sector issuers are likely to follow suit. Out of all current SLB issuers, we noticed that 70%* selected KPIs related to the reduction of greenhouse gas (GHG) emissions. Among these issuers, our data shows that 32%* are currently aligned with the Science Based Target Initiative (SBTi), demonstrating the high ambition of their chosen targets. In 2022, we expect KPIs to remain heavily weighted toward GHG emission reductions while also becoming more innovative and diverse.
Countries with most SLB issuances*
Distribution of SLB issuances across sectors globally*
A diverse range of issuers
For LuxSE and LGX, 2022 started as strongly as the previous year ended in terms of sustainable finance. Among this year’s new issuers, we welcome Snam, one of the world’s leading energy infrastructure operators, with the listing of its inaugural dual-tranche SLB worth EUR 1.5 billion. The bond reflects Snam’s commitment towards sustainable finance as a key pillar of its strategy which includes carbon neutrality target by 2040 and the development of its energy transition businesses. The SLB will also contribute to the company’s goal of achieving more than 80% of its funding through sustainable finance by 2025, compared to 60% at the end of 2021.
*Source: LuxSE’s Trends and Characteristics of the SLB market study, based on the information contained in the LGX DataHub, a database of structured sustainability data on more than 5,400 GSSS bonds, from 1,500 issuers – covering close to the entire universe of listed GSSS bonds worldwide.
Disclaimer: This article was originally featured in ICMA's quarterly newsletter, distributed in March 2022.