The issuance of sustainability-themed debt instruments, including green, social, sustainability and sustainability-linked bonds is expected to surpass $700 billion in 2021, the ratings agency said. The amount will take cumulative issuance past the $2 trillion milestone, from $1.3 trillion as of the end of 2020, it said in a report.
“We expect global issuance in sustainable debt [to grow], driven by an acceleration of green-labeled bond issuance and continued growth of other sustainable debt instruments, including social and sustainability bonds,” S&P said.
Last year, sustainable debt products surged 63 percent to exceed $530 billion, the agency said.
Social bonds emerged as the fastest growing segment of the market, growing about eight times in 2020, driven by the COVID-19 pandemic and growing concern about social inequities.
As issuer attention shifted toward financing pandemic aid and ensuring recession relief measures, green bond debt slowed in the first half of 2020. However, it rebounded in the second half, reaching a record annual issuance amount of $270 billion and indicating that issuer and investor appetite for financing climate response and other environmental objectives is strong and accelerating.
“We believe green-labeled bond issuance could exceed $400 billion in 2021, as global political and regulatory actions grow, serving as a catalyst for increased sovereign and private issuance. We also believe the green use-of-proceeds model will expand to include transition finance, aiding high-carbon-emitting sectors to finance their transition into net-zero emissions business activities.”
The agency also expects to see rapid growth of sustainability bonds, which target both social and environmental objectives, as well as greater interest in sustainability-linked instruments.
“In addition, as the transition to a net-zero economy concept gains traction, we believe new sectors and issuers will enter the market, expanding the pool of investable sustainable financing and allowing investors to diversify their contribution to sustainability objectives.”
Europe’s share of the green bond market, about 54 percent in 2020 according to the Climate Bonds Initiative (CBI), will continue to grow, particularly as green bonds are issued to finance technologies that help meet the European Union’s transition to net-zero carbon emissions by 2050.
Sovereign green bond issuances in the second half of 2020 included the bond worth 6.5 billion euros issued by the German government, the largest ever single green bond to date, as well as Sweden’s $2.3 billion green bond.
Italy, Spain, and the United Kingdom are among European nations planning to sell their first sovereign green bonds in 2021.
US-based issuers, who accounted for more than $51 billion or 19 percent of total issuance in 2020, are expected to maintain their dominant position in the market, given the environmental priorities set out by President Joe Biden’s administration, which include achieving a 100 percent clean energy economy and reaching carbon neutrality by 2050.
“We are also likely to see an uptick in green bond issuance in the Asia-Pacific region as China and Japan aim for carbon neutrality by 2060 and 2050, respectively,” the S&P report said.
The ratings agency expects sustainability-linked bonds (SLBs), which currently make up only a very small part of the sustainable debt market, to experience significant growth in 2021.
Unlike green, social and sustainability bonds, which rely on proceeds being allocated to specific green or social projects, SLBs give companies incentives to advance their sustainability agenda more broadly by directly linking their cost of funding to the achievements of specific sustainability performance targets.
The sustainable finance landscape is growing and evolving, as new financing instruments, including transition and sustainability-linked financing, complement green, social and sustainability bonds.
“We believe growth in these instruments will be global, accelerated by ambitious environmental commitments and the call for a greater focus on mitigating social risks. In our opinion, improved transparency and reporting practices are key to fostering credibility and propelling future issuance,” the report said.
Writing by Brinda Darasha
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