Pandemic will weigh on green bond issuance this year
Issuance in March saw the largest drop in the first six months of this year due to the pandemic
The green bond market segment saw a major drop in the first half of 2020 due to the impact of the COVID-19 pandemic on economies and capital markets. The downturn came after a strong 2019 when there was a record issuance of green bonds.
What next
The green bond segment is set to recover during the second half of the year as several governments are expected to issue such bonds. The strength of the recovery will be closely linked to the evolution of the pandemic and the inclusion of green components in stimulus measures. Latin America and the Caribbean will probably remain an area of growth, with governments there issuing more green bonds in the coming years.
Subsidiary Impacts
- Green bonds will be a key part of future efforts to make the global economy greener and more resilient to future crises.
- The development and harmonisation of taxonomies, principles and standards will contribute to the long-term growth of green debt.
- The growth of the green bond asset class will help create new jobs in green finance.
Analysis
The green bond market segment has seen healthy expansion in recent years amid increasing concern over climate change and sustainability, and growing investor demand for assets linked to Environmental, Social and Governance (ESG) criteria (see INT: Income and climate change risk are not correlated - September 5, 2019 and see INT: Cities are at the fore of global warming threats - October 8, 2019).
These use-of-proceeds bonds have also allowed issuers to broaden their investor base and display their green credentials. Cumulative issuance since the segment's inception in 2007 reached USD754bn dollars last year.
The outbreak of COVID-19 hit global financial markets hard and the sale of green bonds was dragged down with it (see INTERNATIONAL: COVID-19 climate impact may be brief - March 27, 2020 and see INTERNATIONAL: COVID-19 to hinder climate diplomacy - April 14, 2020). Green bond issuance halved to USD84.7bn in the first six months of 2020 from USD172bn in the same period last year, according to the Climate Bonds Initiative (CBI), a not-for-profit supporting the development and growth of the asset class.
Green bond issuance halved year-on-year in the first half of 2020
Issuance fell from USD15.6bn in February to USD3.3bn in March, the slowest month for green bonds since December 2015.
The January-June figures nevertheless illustrated the resilience of the green debt segment, which bounced back in April, with issuance of USD16.4bn.
Full-year outlook
The green bond segment increased last year to a record USD259bn, from USD171bn in 2018. The total number of issuers increased to 506 from 347, with the largest green bond volumes issued in the United States, China and France. Energy, buildings and transport were the main categories of green bond financing in 2019.
Initial expectations were that 2020 would become another record year (see INTERNATIONAL: Green bond market set to strengthen - September 9, 2019), with the CBI and rating agency Moody's expecting green debt issuance of USD350bn and USD300bn, respectively.
The impact of the COVID-19 pandemic has prompted Moody's to lower its forecast to a range of USD175-225bn. The CBI has stuck to its estimate while acknowledging that it has become a challenging goal; it is bullish regarding the second half of the year, due to the expectation of several large sovereign issues.
The green bond appetite among financial institutions and corporations during the rest of the year is more uncertain and will depend on the evolution of the pandemic, economies and financial markets.
Social and sustainability bonds
The health crisis has put a focus on other use-of-proceeds bonds, which have had an unintended impact on green bond issuance.
Having already seen significant growth in 2019, the sale of social and sustainability bonds saw a major increase in the first half of the year due to the pandemic. Proceeds from social bonds are earmarked for projects that have a social impact, while sustainability bonds finance a mix of green and social projects.
Sales of social and sustainability bonds increased in the first half of 2020
In January-June, the issue of social and sustainability bonds amounted to an estimated EUR34.3bn (USD40.8bn) and EUR34.0bn, respectively, compared to EUR15.4bn and EUR35bn in the whole of 2019, according to Dutch bank ING.
Several regular green bond issuers shifted their focus to crisis mitigation due to the pandemic, and ING estimates that EUR8bn went to social bonds instead of green bonds in the first half of the year.
Social and sustainability bonds are set to see continued strong growth this year and beyond as these securities are expected to follow in the footsteps of the green bond segment, with greater issuer diversification in terms of geographies and sectors.
With the help of the social and sustainability securities, the broader ESG bond universe could have a good year in 2020 even if green bonds fail to live up to the initial high expectations.
Strong Latin American potential
Latin America and the Caribbean (LAC) has become the emerging-market region with the largest number of countries where green bonds are sold.
At the end of 2019, green bonds had been issued in 35 emerging markets, of which eleven were in LAC, according to cumulative figures from the International Finance Corporation (IFC), the World Bank's private sector arm. The cumulative green bond issuance for LAC in 2012-19 was USD13.4bn; last year saw the first-ever issues take place in Barbados, Ecuador and Panama.
Most of the green bond sales in LAC are still highly concentrated in terms of countries and issuers but the region is moving towards greater diversification, especially with regard to sovereign issues.
Chile last year became the first LAC nation to sell sovereign green bonds. It made a third issue in January this year, bringing its sovereign total to approximately USD6.23bn. All the issues saw strong investor demand and low interest rates, and generated positive international press for the country.
Latin American governments are taking a particular interest in green bonds
Chile's green bond success is widely expected to lead to sovereign issues from countries such as Colombia, Costa Rica, the Dominican Republic, Mexico and Peru. Some of these issues could have come this year but due to a change of priorities because of the pandemic, they are more likely to come in 2021.
The example of Chile also shows a key trend in the green bond segment -- after the first sale issuers tend to come back to market with more and much larger issues. This in turn fuels the growth of the asset class.
This year has also seen Brazil stand out on the green bond front, at a time when there has been very strong international criticism of President Jair Bolsonaro's lack of protection of the Amazon rainforest (see BRAZIL: Agribusiness focus risks rise in deforestation - July 23, 2019).
In June, the infrastructure ministry announced Latin America's first green bond programme to fund infrastructure projects. This will play a key role in the country's post-pandemic economic recovery.
The initial focus of the programme will be the railway sector. Praised by the CBI as an important milestone, the programme will help decarbonise the Brazilian logistics sector, which currently relies heavily on roads and diesel-powered truck transportation.
Last year also saw the CBI sign a Memorandum of Understanding with Brazil's agriculture ministry to identify green and sustainable opportunities in one of the country's most important business sectors.
Brazil ranked third among all emerging-market nations in terms of cumulative 2012-19 issuance, with USD5.43bn according to the IFC. Latin America's largest economy is likely to see a strong green bond expansion in the coming years as a result of the initiatives being undertaken with the help of organisations such as the CBI.
