Green bond issuance recovers after early 2020 pause & wider ESG sales pick up pace
Green and sustainable/social bond issuance has exploded in very recent years as sovereigns, corporates and financials have all rushed to tap into investors' increasing care for the environment and climate change, and subsequent demands for their money to make a positive impact on society and the world at large. 10-years ago such issuance totalled just USD600mn globally, increasing to almost USD35bn in 2015, and in 2019 it topped USD200bn, according to our database, which tracks just international syndicated bonds.
2020 was expected to be an even stronger year for issuance, particularly with the sustainable bond market still in its infancy and seen having plenty of room to grow.
The Covid-19 pandemic then put a dent in Green issuance and general capital market activity in the latter part of Q1/early Q2, although this did prove to be temporary. Indeed, after dipping as low as USD7bn in March, monthly Green bond issuance had more than doubled by May and has continued to increase, as can be seen in the dashboard. Green bond issuance ytd has exceeded the same period last year by ca. USD40bn (at ca. USD134bn) and if anything, the pause earlier this year looks to have set the market up for a strong run into year-end.
Meanwhile, it was notable that whilst Green bond issuance dropped off earlier in the year, there was a surge in social and sustainability bonds liked to coronavirus support measures, which helped to pick up the issuance slack for the wider ESG market, as can also be seen in the dashboard.
As a result, Green and ESG/SRI bond issuance reached almost USD114bn in Q2, a quarterly record and an increase of more than 85% on Q1.
In fact, globally, Green and ESG/SRI bond issuance combined for the year is already at a record ca. USD260bn, more than double the ca. USD124bn for the same period in 2019 and USD60bn more than all of last year's total, according to our records (see the dashboard).
So far this year, Green and ESG/SRI bond issuance accounts for a little over 6% of the total global bond issuance that we have tracked, compared to 5% for the whole of 2019 and up from 1% in 2015. Hence, this asset class has formed an increasing share of all annual bond sales recorded globally.
Breaking down the figures, on a sector basis, SSA easily makes up the bulk of the Green and ESG/SRI bond issuance year-to-date, at just over USD160bn, which is a new annual record. Finance has raised around USD36bn and corporates ca. USD63bn, both up on this time last year.
September has provided a number of firsts for ESG issuance
It has been a couple of weeks since the primary market restarted after the Summer lull, and of the USD264bn that has been issued globally so far in September, around 14% of this, or USD38bn, has been some form of ESG issuance. The majority in the form of Green bonds, but there has also been a fresh increase in broader social bonds and all have attracted strong demand. Below we list some of the notable deals so far:
- Saudi Electricity became the first provider of green paper from the Kingdom, raising USD1.3bn with a dual tranche sukuk offering of 5- and 10-year tenors for which the proceeds will be used to upgrade smart meters. Both tranches landed 30bp inside IPTs, at m/s +140bp and +170bp, respectively, around 15bp inside fair value by our calculations. This sale lifted the running total of green and ESG/SRI bond issuance out of the Middle East and Africa region since 2016 to USD4.79bn.
- Brazilian pulp and paper company Suzano was the first EM corporate borrower to issue a sustainability linked bond (SLB), tied to cutting its greenhouse gas emissions by 15% over ten years. Should the firm fail to be on track to reach the target by 2026, it will have to pay an additional 25bp on its 3.75% coupon. The deal attracted bids of more than USD6bn and priced at a yield of 3.95%, 15bp inside fair value. While green finance structures tend to link the money raised to fund specific environmentally-focused projects, the SLB can be tied to environmental goals at the company level. Suzano is only the second issuer to sell a bond under the SLB structure, after Italian energy firm Enel in late 2019.
- Hungary was the first ever sovereign to sell green Samurai bonds, raising a total of JPY62.7bn in a multi-tranche deal that composed of 3- and 5- year conventional bonds, and green tranches with 7- and 10-year maturities. One of the leads said the issuer strategically opted for only the longer dated tranches to be green bonds to encourage investor participation in these tranches and to help it achieve duration while maximising its size.
- Germany and Sweden also issued inaugural Green bonds at the beginning of the month. The former amassed books of EUR33bn+ (including EUR2.45bn JLM), the largest demand ever for a EUR-denominated Sovereign Green issuance, pricing 1bp through the equivalent non-green conventional bond. Additionally, German corporate Daimler attracted peak demand of over EUR8.4bn for its debut Green bond which came in the form of a EUR1bn 10-year. Although that demand dropped down considerably to EUR4.2bn, it still marked the borrower's biggest ever book size for a single tranche and allowed Daimler to issue the bond 55bp tighter than IPTs and some 20-25bp inside its existing vanilla curve.
- Elsewhere, the biggest US bank by assets, JP Morgan, made its debut in the Green bond market with a USD1bn deal, thus joining other top Wall St. banks that have sold debt to finance green or social projects this year amid a growing acceptance within the US that a climate crisis threatens both environmental and financial instability. High investor demand saw the bonds price at a spread of 48 basis points over Treasuries, after they were initially marketed in the range of 65bp. In a public filing, JPM said proceeds from the debut green bond would finance a range of projects from green buildings to renewable energy.
Favourable pricing conditions for ESG deals
Based on our data collected for September so far, funding costs, demand and new issuance concessions for ESG bonds have all proved more favourable on average compared to non-ESG debt. As can be seen in the below table, yields on average have been 70bp softer, whilst the average bid cover for ESG issuance has totalled 5.0, compared to 4.0 recorded for non-ESG issues. In addition, ESG bond issuance has on average priced with a negative new issuance concession of -7, compared to +1 for non-ESG bonds.
Meanwhile, data tracked by our partners at EPFR, shows ytd cumulative net inflows to SRI/ESG tracked bond funds have maintained the upwards trajectory that has been in place since March, reaching almost 20% of AUM this month (see below chart). These flows have notably outperformed that for non-SRI/ESG bond funds and this is a trend we would expect to see persisting.
Continued growth of the ESG market anticipated
Back in August, Moody's said it was expecting environmental, social and governance risks to become increasingly important, underpinning the continued growth of the market, and projected the volume of newly issued debt based on environmental, social and governance principles could reach a new record USD375bn this year. With regards to Green bonds, the most mature segment of the ESG market, Moody's has estimated between USD175bn to USD225bn would be issued, but was forecasting as much as USD300bn in February, prior to the pandemic.
The performance of recent deals amid robust orderbooks supports expectations for continued growth in the ESG sector and from an investor perspective, growth in Green and ESG/SRI bond issuance provides greater opportunities/selection for portfolio diversification for those seeking a positive impact from their investments.