The strong US dollar flavour of the rapidly growing sustainability-linked bond market in early 2021 is raising issuance forecasts, with some now expecting US$150bn of SLBs this year, even though the full might of the European Central Bank’s buying power has yet to be felt.
The market was expecting a wave of euro-denominated deals to take advantage of the ECB’s ability to buy SLBs from January 1 as central bank collateral and for its quantitative easing programmes.
However, of the US$5bn-equivalent of SLBs sold so far this year, the vast majority – US$3.825bn – have been US dollar-denominated deals for issuers in Latin America and Asia, along with a range of local currency transactions in Singapore dollars, Norwegian kroner and yen.
"Sustainability-linked has really accelerated recently and maybe not where we might have expected,” said Navindu Katugampola, head of sustainable investing at Morgan Stanley Investment Management Fixed Income.
“We thought the ECB's ability to buy those instruments would galvanise issuance from European entities, but we've seen a lot of emerging markets issuance in the sustainability-linked bond format. I think that's really encouraging."
The suitability of the SLB format to finance companies’ energy transition strategies is responsible for the enthusiastic uptake from developing markets, and US corporates are expected to boost the total further, given the priorities of the new Biden administration.
This broader adoption is being seen as a positive sign, as ECB buying is still expected to support issuance from eurozone companies.
"Throughout the year I do expect to see more ECB-compliant issuance. We're just in February and we're having many discussions," an ESG banker said.
SLB volume of US$5bn-equivalent so far this year is fast-approaching last year's total US$7.7bn, and Marilyn Ceci, JP Morgan's global head of ESG DCM, is predicting issuance of US$120bn–$150bn, and expecting to see the upper end of that range.
Investors agree that US$100bn-plus is feasible, as transitioning issuers that previously struggled to find sufficient use of proceeds for green bonds turn to SLBs.
Total said last week that it would now only issue SLBs, raising the prospect of billions of euros of issuance from the French oil and gas major alone. More high-emitting companies are expected to follow its lead.
“Momentum begets momentum in this space,” said Arthur Krebbers, head of sustainable finance for corporates at NatWest Markets.
Of the wide range of SLBs seen so far this year, only two have been in euros: a €500m SLB last week for Swedish clothing retailer H&M, which is the first ECB-eligible SLB deal, and a €750m SLB issued in January by UK supermarket operator Tesco that is not ECB-eligible.
To be eligible for ECB purchase, euro-denominated SLBs from the eurozone will have to have "pure green" environmental-only KPI targets, whereas deals from other regions are expected to include social KPIs, and deals linked to ESG ratings.
Clarifies Tesco issuance