Europe set to drive green bond issuance in 2022
Green bond new issuance growth is set to accelerate by 25 per cent to EUR500 billion in 2022 compared to 2021, with Europe leading the way, according to new forecasts from NN Investment Partners (NN IP).
NN IP expects vast momentum in Europe, with the EU issuing EUR250 billion over the next 5.5 years to support the Next Generation EU fiscal plan. The introduction of the EU Taxonomy, which defines clear green criteria for a number of sectors, should also encourage issuance. Finally, there is still some catch-up on issuance from 2020. Social and sustainability bonds are set to hit EUR200 billion each in 2022, but growth in these areas will be constrained by a lack of standard definitions.
In September, the green bond market passed a significant milestone of EUR1 trillion of outstanding green bonds. Social and sustainability bond have also seen growth. The chart below shows the development of the green, social and sustainability bond issuance over the last eight years, and NN IP’s prediction for 2022.
Green bond issuance is likely to grow EUR100 billion from 2021 levels to be around EUR500 billion in 2022. Social bond issuance is likely to grow EUR25 billion from 2021 to EUR200 billion in 2022, while sustainability bond issuance is likely to grow EUR55 billion from 2021 levels, to EUR200 billion. However, growth in these latter two areas is likely to be constrained by a lack of clear definitions on, for example, eligible use of proceeds. The EU Social Taxonomy will help, but it is still in draft form.
Douglas Farquhar, Client Portfolio Manager Green Bond, expects growth in the labelled fixed income market to remain dominated by European issuers and entities. “In particular, the EU is expected to take centre stage on issuance with an estimated EUR50 billion-EUR100 billion in green bonds coming to market in 2022 to support European countries hit hard by the Covid-19 crisis. We are also expecting a strong acceleration of sectors that have previously lagged in green bond issuance, including metal and mining companies, oil and energy companies and chemical companies.
“With the increased interest from investors in ESG-led investment, we would ultimately expect the US also to start playing a more dominant role in the sustainable fixed income market. While we have not seen any signs at this stage that the US Treasury is planning to issue green or other labelled bonds, it may look to emulate European success in the longer term.”
The physical risks of climate change becoming more visible in the form of extreme and changing weather patterns in 2021. At the same time, the Covid-19 pandemic effects continue to cause economic disruption. Against this backdrop, it is vital that a greater percentage of government-related and corporate bonds are green, social or sustainability bonds.
Recent years have seen ‘label-mania’ with a range of new bond labels launched. Social bonds have dramatically increased as a result of the Covid-19 pandemic with government and supranationals issuing social bonds to fund the recovery and support people through this uncertain time. Sustainability bonds have also proven popular for issuers who wish to finance a mix of environmental and social projects.
However, the market for sustainability-linked, social or transition bonds will be constrained until standards are agreed. Transition bonds in particular, have suffered from the emergence of sustainability-linked bonds and investors remain to be convinced of the need for a transition label when green bonds are a transition mechanism with clearly defined standards. Sustainability-linked bonds – where issuers set their own KPI’s and targets linked with debt – have attracted criticism for the structure, lack of focus on the most material ESG metrics and level of investor compensation in the form of a step-up if issuers fail to meet their self-imposed targets.
In conclusion, 2022 looks likely to be another buoyant year for green bond issuance, dominated by Europe, but with a range of new sectors coming to market. Social and sustainability bonds need stronger definitions to make significant progress. This is happening, but slowly. Overall, the expansion in the market continues to provide additional liquidity and diversification for investors who want to make green bonds a realistic replacement for part or all of their fixed income allocation.