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Green bonds, sustainability funds enjoyed a record year in 2021: industry data

03 February 2022 Max Tingyao Lin

The latest industry studies confirm the green finance and wider sustainable space enjoyed a rapid expansion last year, with asset manager BlackRock playing a leading role and sovereign bonds emerging as the top investment targets.

Bolstered by new climate pledges from national governments and increased appetite for sustainable investments at the retail level, private-sector players—including hundreds of financiers—have vowed to ramp up decarbonization investments in recent quarters.

A report released by Morningstar 31 January showed that the total investment pot of sustainability funds globally reached $2.74 trillion at the end of December, an all-time high, up 9% quarter on quarter, and 53% year on year.

The number of sustainable investment funds globally reached 5,932 at the end of last year, including 266 new launches in the fourth quarter. There were 5,330 funds at the end of September.

Those figures took into account open-end and exchange-traded funds that claim sustainability as their main objective or have binding environmental, social, and governance criteria. They include funds devoted to countering climate change. Morningstar sifted out some funds with exposure to controversial areas like weapons, tobacco, and thermal coal.

Market dominance

Investors poured nearly $143 billion into the funds on a net basis between October and December, up 12% from the third quarter. This compared with a 6% drop in net inflows to $570 billion in the overall global fund universe.

"The uptick in sustainable net flows was driven mainly by Europe," said Morningstar, a US-based financial services firm. "In contrast, all other regions, except Australasia [Australia and New Zealand], saw modest inflows."

As of the end of December, the total funds under management by European sustainable funds amounted to $2.23 trillion, or 79% of the global total.

Net inflows in the final quarter of last year reached $113 billion. BlackRock was the most popular fund provider, raking in almost $16.9 billion; other leading players included UBS with $8.68 billion and Amundi with $6.34 billion.

Morningstar data showed the US remained the second largest market for sustainable funds with a total size of $357 billion at the end of December, or 13% of the global total. Net inflows reached $14.2 billion last quarter.

Of the 10 funds attracting the most money in the October-December period, four were marketed under BlackRock's iShares brand. Morningstar estimated their inflows totaled $3.86 billion.

A study led by Peter Gardett, an executive director for climate and cleantech at IHS Markit, found that BlackRock was the keenest asset manager in acquiring bonds whose proceeds are mainly used to invest in clean energy installation, emissions reduction from a shift in energy sources, and use of renewables.

In March-December 2021, the company obtained positions in 74 of the 252 such green bonds issued per IHS Markit's definition.

"BlackRock has clearly been aligning some of its very large investment portfolio with its stated ambitions to be a climate finance leader," said Gardett, commenting on the company's activities in the bond and fund markets.

In recent public remarks, BlackRock Founder and CEO Larry Fink suggested the company is placing a big bet on the transition to a low-carbon world, a shift that will span decades.

"The tectonic shift towards sustainable investing is still accelerating," he said in his annual shareholder letter last month. "Whether it is capital being deployed into new ventures focused on energy innovation, or capital transferring from traditional indexes into more customized portfolios and products, we will see more money in motion."

Power of the sovereigns

With strong appetite from investors at various levels, the market for climate-related bonds has been buoyant. Initial data from the UK-based Climate Bond Initiative (CBI), which has been tracking bonds marketed as being green since 2007, showed global green bond issuance totaled a record $517 billion in 2021. This compared with $297 billion in 2020.

CBI has a broader definition of green bonds than IHS Markit, and its estimates take into consideration bonds issued to fund environmental projects for water monitoring, recycling, walking and biking infrastructure, plus telecommuting, among other objectives. But both sets of data suggest sovereign issuers are becoming the top players.

According to CBI, 21 sovereign green bonds were launched last year, including what equate to multi-billion-dollar issues by France, Germany, and the UK. IHS Markit's data suggests sovereign states were responsible for 12% of the 252 green bonds issued between March and December—but they accounted for 51.5% of the total issuance value of $306 billion.

With their green bond offerings, national governments are sending strong signals to the private-sector players in their respective countries, Gardett suggested.

"Last year, sovereigns were the leading indicator—after they issued, other companies and borrowers did," he told Net-Zero Business Daily. "Whenever a sovereign raised [capital], it seemed to clear the way for local firms and banks to issue green bonds as well."

The outlook for green bonds remains bright. CBI expects another significant hike in global issuance to somewhere between $900 billion to $1 trillion this year.

With interest rate hikes expected in Europe and the US, Gardett expects sovereign issuers to continue to play a leading role in the green bond market this year. India and Canada are among the countries planning to make their first forays in the coming quarters.

"The rising interest rates affect sovereigns, but they are in many cases legally obligated to spend the money and will issue unless rates completely spiral," he said. "Private borrowers may be hesitant to take on new debt … They will almost always pay a premium to sovereign debt anyway, so their cost of capital compounds at a faster pace than it does for governments."

Posted 03 February 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

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