The Growth of Sustainable Bonds: Key Data You Need to Know
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The Growth of Sustainable Bonds: Key Data You Need to Know
Sustainable bonds, also known as green bonds, have seen rapid growth in recent years as investors increasingly seek out investments that have positive environmental and social impacts. Here is some key data on the growth of the sustainable bond market that is useful to know:
What are Sustainable Bonds?
Sustainable bonds are fixed income financial instruments whose proceeds are used to finance or refinance projects with clear environmental and social benefits. Some examples include renewable energy, green buildings, clean transportation, and sustainable water infrastructure projects. Issuers of sustainable bonds include development banks, commercial banks, corporations and governments.
The proceeds must adhere to predefined eligibility criteria and the issuer must report regularly on how the funds are allocated. This provides transparency and reassurance to investors that their money is having the intended sustainability impact.
Total Global Issuance
- Global issuance of sustainable bonds reached a record $871.9 billion across 5,261 deals in 2022, a 20.3% increase from 2021 issuance of $725 billion, according to data from Environmental Finance.
- Issuance has grown rapidly from just $37 billion in 2014. Compound annual growth rate (CAGR) from 2016-2022 was 49%.
Regional Breakdown
- Europe continues to dominate issuance, making up 51% of the global total in 2022 at $448.6 billion. However, its share of the global pie has fallen from 64% in 2020 as other regions ramp up activity.
- Sustainable bond issuance from the Asia-Pacific region grew to $163.4 billion in 2022, making it the second largest source with a 19% share. China alone issued $123 billion.
- North America was the third biggest regional market with $139.6 billion issued.
Types of Sustainable Bonds
The three major types are:
- Green Bonds – 89% share of total issuance in 2022. Proceeds go towards green projects like renewables or green buildings.
- Social Bonds – 5% share. Fund social projects like affordable housing or boosting employment.
- Sustainability Bonds – 6% share. Fund both green and social projects.
Top 5 Countries by Issuance
The top five countries issuing sustainable bonds in 2022 were:
- United States – $224.7 billion
- France – $ 102 billion
- Germany – $97.1 billion
- China – $123 billion
- Netherlands – $60.8 billion
The US has been the single largest issuing nation since 2016 while China and European countries also dominate issuance levels.
Issuer Profile
In terms of issuer types in 2022:
- Sovereign, supranational and government agencies made up 26%
- Financial corporate issuers accounted for 25%
- Non-financial corporate issuers made up 22%
- Development banks issued 19%
- Local government & municipalities 8%
Investor Demand
Surveys consistently show strong investor appetite for sustainable bonds across both institutional and retail investors:
- 78% of global fund managers expect to raise their allocation to sustainable bonds in 2023, according to a survey by NN Investment Partners.
- 75% of retail investors show interest in allocating to green bonds to fulfill sustainability preferences according to Morgan Stanley.
This investor pull is aiding the rapid growth of the market and enabling issuers to broaden funding sources. Higher demand leads to better borrowing costs in many cases too.
Key Drivers of Growth
The growth trends show no signs of slowing down. Several interlinked drivers are powering the expansion in issuance and investor demand:
- Greater awareness of sustainability issues like climate change amongst issuers and investors
- Government policy through incentives, frameworks and sovereign issuance
- Regulatory push from financial regulators
- Increasing ESG-linked lending & investment mandates
- Strong performance of green bonds reassuring investors
- Improved transparency through reporting
Outstanding Market Size
The rapid pace of new sustainable bond issuance over the past decade has led to a swelling total market size for this asset class.
According to data from the Climate Bonds Initiative, the total value of outstanding labeled green bonds reached $1.9 trillion in 2022, a 24% increase from $1.5 trillion outstanding at the end of 2021. Outstanding green bonds have grown at a compound annual growth rate of 49% between 2016 and 2022.
Moreover, if we include the wider universe of aligned bonds whose use of proceeds contributes to environmental objectives, then the outstanding size increases to a mammoth $3 trillion globally as of mid-2022. This is double the $1.5 trillion figure from just two years ago in 2020 for aligned sustainable debt, highlighting the tremendous growth.
As more of the record issuance remains outstanding in coming years, expect the total sustainable bond market to continue expanding rapidly in size and becoming an increasingly important slice of the over $100 trillion global bond market.
Projected Issuance Growth
Most market forecasts point to continued rapid growth in sustainable bond issuance over the next few years as the market builds further momentum.
Bloomberg NEF predicts issuance to rise to $1.35 trillion in 2023 while Moody’s Investors Services sees issuance potentially topping $2 trillion by 2025. Driving this growth will be increased issuance from sovereigns, government agencies and emerging market corporates alongside established Europe and North American issuers.
Moreover, as transparency, impact reporting and verification of sustainability credentials improve in the coming years, this can incentive even greater investor allocation. Large institutional investors like pension funds and insurance firms are aiming to continue raising their sustainable fixed income allocation, providing a strong base of demand for new issuance.
The opening up of China’s massive domestic green bond market to global investors also offers huge room for growth. In summary, projections indicate issuance rising by over 50% in the next 2-3 years as sustainable bonds become increasingly mainstream.
Final Words
The sustainable bond universe has grown enormously over the past decade. 2022 saw another record year for global issuance at $872 billion as both issuers and institutional investors continue to prioritize ESG factors. Europe and the US dominate issuance, but emerging markets, especially China, are contributing more. Expect the market to continue seeing dramatic growth in the next few years as companies and governments use sustainable bonds to fund environmental and social projects.
