Sustainable debt issuance of US$360bn set new quarterly records for bond and loan issuance in the first three months of 2021, as ESG continued to take a larger share of the overall market despite increasing regulation.
ESG debt issuance showed a more than three-fold year-on-year increase from US$108.88bn a year earlier as sustainability became an increasingly critical factor for companies seeking to raise capital.
Record quarterly ESG bond issuance of US$270bn was matched by record quarterly loan volume of US$90.034bn, as the sustainability-linked loan market revived after a quieter 2020 and companies such as Italian utility Enel and global drinks giant Anheuser-Busch InBev raised SLLs of more than US$10bn each.
The record in the bond market showed a four-fold year-on-year increase from US$65.57bn in the first three months of 2020 as the Covid-19 crisis unfolded, and was 50% higher than the previous record of US$180bn in the fourth quarter of 2020.
"It's been a particularly strong quarter for ESG. I've never really seen the market like this," said Trisha Taneja, head of ESG advisory for capital markets at Deutsche Bank.
That US$270bn of ESG bond issuance made up around 11% of total global bond issuance of US$2.5trn in the quarter, up from 9% in the fourth quarter and just 3% a year earlier. The full-year figure for 2020 was 5%.
“Sustainable finance has become a much more significant part of total primary issuance,” said Farnam Bidgoli, head of ESG solutions for EMEA at HSBC.
Rise of SLBs
The main story of the first quarter was the rise of sustainability-linked bonds as an increasingly wide range of borrowers adopted the format and as work pushes ahead on standardising the KPI targets that determine pricing.
Some US$10bn of SLBs were issued in the first quarter. Just over half of the total was in EMEA, as issuers such as Dutch food retailer Ahold Delhaize tapped the market with a €600m nine-year SLB that was the first to set a KPI on food waste.
More issuers are working on frameworks and metrics that will give them the ability to issue at short notice and volume predictions are rising to up to US$150bn in 2021 as some bankers estimate that it could even account for half of all corporate issuance.
"2021 has been dubbed the year of the SLB by a lot of market participants, so we expect that to continue to rise," said Amrita Ahluwalia, a capital markets lawyer at Linklaters.
Europe took the lion’s share with US$74bn of the US$125.5bn of green bonds that were issued globally in the first quarter, and also dominated in social bonds with US$81.52bn of the US$91.3bn of the social bonds issued as the EU continued to issue under its SURE programme.
The US market, however had higher issuance of sustainability bonds (a mix of green and social) with US$16.8bn of the total US$43bn issued in the first quarter, compared with US$13.7bn issued in Europe.
Another story of the quarter was the spillover of ESG into leveraged finance in EMEA and the US.
Greece’s state-owned utility Public Power Corp in mid-March issued Europe’s first high-yield sustainability-linked bond, which was quickly followed by a transaction from German container shipping company Hapag-Lloyd.
“I’ve not seen anything grow this fast in a long time," Taneja said.
Issuance from banks and insurance companies has also picked up as financial institutions become more familiar with ESG formats, and work continues on issuing the first sustainability-linked bonds for the sector.
Despite setting a high bar for issuance in the first quarter, the sustainable finance market is expected to continue on an upward trajectory for the rest of the year.
“The pandemic has contributed to recent record issuance and we expect issuance volumes to continue to grow,”said Richard O'Callaghan, a capital markets partner at Linklaters.