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Green debt issued for use in clean energy, building, and
transportation initiatives dominated the $1.1 trillion sustainable
bonds market in 2021, topping the half-trillion mark for the first
time since UK-based Climate Bonds Initiative (CBI) began tracking
it in 2007.
Taking advantage of low global interest rates and buoyed by
national net-zero pledges for decarbonization, sovereign nations,
banks, and companies issued $522.7 billion in green debt, a 73%
increase over the prior year, according to CBI's Sustainable Debt Global State of
the Market 2021 report released 21 April.
However, some analysts caution that the growth spurt green bond
markets enjoyed in 2021 may not necessarily carry over into 2022
due to market volatility driven by the war in Ukraine and higher
global interest rates.
CBI has been tracking green bonds that align with its definition
of "green" since the European
Investment Bank first issued this type of debt in 2007.
Green bonds are issued typically to fund large-scale,
capital-intensive, green infrastructure projects such as energy
efficiency, transit, or renewable power that result in positive
environmental outcomes, including climate benefits.
Source: Climate Bonds Initiative
More green financing needed
CBI CEO Sean Kidney said the trillion dollars issued across
sustainable markets suggest that "capital is beginning to shift at
scale—but more is needed."
"The unprecedented times in which we live call for unprecedented
levels of action. Failure to affect immediate redress in the
environmental merits of global finance implicates market actors as
accessories to irreversible climate catastrophe," Kidney added.
Towards the end of December, the green bond market was hurtling
towards the half-trillion-dollar mark with $443 billion in debt
issuance. But that was a month after world leaders met at the UN's
COP26 meeting on climate change in Glasgow, Scotland, and pledged
to decarbonize their economies.
In the runup to COP26, the green bond market saw a flurry of
activity with investors looking to capitalize on low interest
rates, while demonstrating their commitment to clean energy
technologies. CBI data shows almost $86 billion of green debt was
issued in September alone.
CBI data show developed economies dominated green investments in
2021, with Europe "the most prolific region," recording $265
billion in green debt, mostly from banks and sovereign nations. The
Asia-Pacific region followed in second place with $129.5 billion in
green debt.
No African countries issued green bonds last year, which CBI
attributed to their focus on recovering from pandemic-induced
lockdowns.
Companies taking the lead in green bonds
Countries as well as companies are increasingly using or
evaluating green bonds as viable financial instruments for raising
capital for climate and cleantech solutions that align with their
net-zero goals.
In terms of issuers, companies led the way with $140.6 billion,
followed by banks with $135 million, and sovereign nations with
$72.8 billion.
Among corporate issuers, China Three Gorges Corporation, a
state-owned power company, issued the most bonds, 18 that were
priced at a combined $7.2 billion. Spanish company Iberdrola issued
three bonds priced in total at $3.3 billion, including one issued in November to finance
renewable projects in Poland and Australia.
Ford Motor Company debuted in the arena in November with a
10-year, $2.5 billion unsecured green bond to fund investments in
its growing battery electric vehicle (EV) portfolio including the
Mach-E, F-150 Lightning, and E-Transit models. The automobile
company floated a bond a day after it announced plans to launch a
sustainable investing framework to drive greater penetration of EVs
and clean manufacturing.
Banks, which had issued just $55 billion in green debt in 2020,
rebounded in 2021 with 17% of the holdings from 31 Chinese banks
and 16% from German banks. A $6.5 billion bond issued by China
Development Bank and $4.5 billion bond from ICPC counted as the
largest issuance in this sector.
Among the sovereign debt issuers, Italy, the UK, Serbia, South
Korea, and Spain entered the sovereign green bond market for the
first time.
Oversubscribed sovereign bonds
The UK was the largest sovereign green bond issuer
across the globe in 2021 with a pair of bonds worth a combined £16
billion ($21.9 billion), followed by Italy with a $10.1 billion
bond. Spain issued a $5.1 billion green bond, Serbia issued one for
$1.2 billion and South Korea for $800 million, according to
CBI.
The sale of the UK's first "green gilt" of £10 billion ($13.6
billion), attracted an order book of over £100 billion ($137
billion), which CBI said was a record high among green sovereign
bonds. The UK's second green bond resulted in an order book
exceeding £74 billion ($102 billion), it added.
Oversubscription remains the defining feature of green and
sustainable bond markets, Peter Gardett, executive director of
climate and cleantech at S&P Global Commodity Insights, said.
"While the level of green premium for both corporate and sovereign
issuances over legacy debt segments remains inconsistent,
underwriters consistently report significantly greater
oversubscription among investors for high-quality green or
sustainable bonds than for other types of instruments," he
said.
Slowdown
While CBI's Kidney expects the green bond market to exceed the
trillion-dollar mark in 2022, other analysts aren't as
optimistic.
In a 20 April note, the
International Institute of Finance (IIF) noted that higher
borrowing costs and heightened geopolitical tensions were weighing
heavily on investors' minds. As a result, bond issuance linked to
environmental, social and governance (ESG) factors slowed in the
first quarter of 2022.
Specifically, the IIF said green bond debt issuance dropped to
around $110 billion in the first quarter of 2022, which it said was
the "slowest volume" seen since the final quarter of 2020, most
prominently in the government sector.
While Italy, France, and the US saw the largest declines in
sovereign issuance activity, emerging markets saw an increase,
largely driven by Chinese government-owned banks and corporations.
In contrast, the IIF said corporate issuance remained at par with
2021 levels.
Posted 21 April 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.