Tailwinds align behind green bond market

IFR 2468 - 28 Jan 2023 - 03 Feb 2023
3 min read
Americas, EMEA, Asia
Tessa Walsh

ESG bonds are expected to resume an upwards trajectory in 2023, driven by surging green bond issuance as decarbonising companies increase spending on renewable energy and regional stimulus programmes kick in.

Deutsche Bank forecasts a 15% increase in green bond issuance to US$510bn from US$441bn last year as subsidy programmes such as the US$369bn Inflation Reduction Act in the US and Europe’s Green Deal Industrial Plan give companies the confidence to invest.

"I'm fully expecting green issuance to dominate because of the drive to invest in green capex,” said Trisha Taneja, global head of ESG origination and advisory at Deutsche.

Green bonds were seen as a safe haven in a turbulent 2022. Of the US$713bn of ESG-labelled bonds issued in 2022, US$394.7bn, or 55.4%, had a green label.

Although this was 25% less than the US$493.8bn of green bonds issued in 2021, the drop was below the 35% decrease from the US$965.3bn of ESG-labelled bonds issued in 2021.

“In uncertain times in 2022, green bonds were the preferred choice and most resilient in terms of volume in a brutal year for fixed income," said Jarek Olszowka, head of sustainable finance at Nomura.

This year is off to a strong start with US$45.89bn of green bonds issued so far, 26% higher than the US$36.4bn at the same point last year. Most of these deals (US$32.1bn) have been issued in Europe, followed by Asia (US$8.9bn), according to Refinitiv data.

"On green bonds overall, we remain bullish. I think it's going to be a strong year,” Olszowka said.

Europe’s introduction of a carbon border tax is also driving an increased need for capital to finance emission reduction in manufacturing sectors in Europe – and globally – as emissions are increasingly priced into the market. "I think this is going to drive an increase in green financing in the market, whether that's bonds or project finance or any other type of financing," Taneja said.

While 2022 witnessed the disappearance of premium pricing for green bonds – the greenium – Deutsche is expecting it to return this year as stabilising market conditions mean that investors are more willing to pay a concession.

Arranging banks say that the incremental demand from investors with green funds or green pockets of funds that was added to order books last year effectively helped to de-risk transactions, and expect this additional demand to translate into a greenium when the market normalises.

"The greenium will come back because fundamentally it's driven by the demand-supply imbalance that we see in the market, and that imbalance still exists," Taneja said.

Bankers also expect increased pricing differentiation for green bonds as work continues on the influential EU Green Bond Standard, which will set a benchmark for "dark green" issuance, potentially resulting in lower pricing for issuers that can meet its criteria.

While more companies are aligning their financing and frameworks to the EU Taxonomy (a classification of sustainable economic activities) many are still struggling with data to meet stringent "do no significant harm" and minimum social safeguards criteria, bankers say.

"In theory there should be a price differential and a larger greenium for deals meeting the EU Green Bond Standard, but there are so many steps and conditions that I wouldn't see this materialising this year," Olszowka said.