Global sustainable bond issuance declined in 1H2024, with 2Q2024 issuance down 20% y-o-y to US$238 billion ($319.35 billion). However, reaching US$1 trillion in full-year issuance is still “within reach”, according to the latest quarterly report on green, social, sustainability, sustainability-linked and transition bonds by Moody’s Investors Service, issued July 30.
Together referred to as sustainable bonds, global issuance in the most recent quarter fell 19% q-o-q, after a spike in 1Q2024 saw US$281 billion in issuances worldwide.
Across the five segments, there were US$146 billion of green bonds, US$39 billion of social bonds, US$41 billion of sustainability bonds, US$8 billion of sustainability-linked bonds and US$3 billion of transition bonds in the most recent quarter.
Taken together with 1Q2024 issuances. volumes across all five categories totalled US$534 billion in 1H2024, 8% higher y-o-y.
“Despite some challenges, sustainable bond issuance remains on track to meet our US$950 billion forecast for full-year 2024, with $1 trillion in annual issuance within reach,” say Moody’s analysts.
See also: Global sustainable bond volumes bounced back in 1Q2024; Moody’s keeps US$950 bil full-year forecast
Debut issuers continue to fall
A decline in the number of debut issuers poses potential constraint on market growth, says Moody’s.
After a twofold surge in first-time sustainable bond issuers in 2021 with a global average of 76 debut sustainable bond issuers per month, the number of debut sustainable bond issuers has fallen by over a third in each consecutive year, with just 20 new issuers on average per month globally in 1H2024.
See also: Transition finance to gain prominence in 2024 as SLBs face greater scrutiny: Moody's
“As the market grows and matures, a drop in new issuers should be expected, but the extent of the decline has become more apparent over the past year as issuers contend with heightened market and regulatory scrutiny and perceived greenwashing risks, and could serve as a limiting factor on market growth,” say Moody’s analysts.
The number of debut issuers in the Asia-Pacific region had been similar to the number of debut issuers in Europe throughout 2023, despite the overall volumes in this region representing only a fraction of those in Europe.
While this trend continued into 1H2024, new issuers from Europe and the Asia Pacific in 2Q2024 declined by almost a third and half, respectively, and a majority of new issuers in the Asia Pacific were non-financial companies.
This occurred as sustainable bond volumes fell 27% y-o-y in the Asia-Pacific region in 1H2024, but Moody’s analysts believe this trend is “unlikely to persist” as an increasing number of issuers choose labelled bonds to fund their transition to lower-carbon operations over time.
Sustainability-linked bond volumes below target
Sustainability-linked bond (SLBs) volumes fell again to just US$8 billion in 2Q2024, 18% lower q-o-q and the lowest issuance level since 4Q2020.
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SLB volumes have continued to fall in recent quarters as investor focus on the ambition of sustainability performance targets (SPTs) and the materiality of financial adjustments has continued to discourage some potential issuers from entering the market, says Moody’s.
Issuer appetite for SLBs will likely remain subdued over the near term, and the segment now appears unlikely to reach Moody’s forecast of US$60 billion of full-year issuance following just US$18 billion of volumes in 1H2024.
The SLB market remains heavily concentrated in Europe, with the region accounting for more than three-quarters of issuance by volume in 1H2024. In fact, issuance from all other regions totaled slightly more than US$4 billion throughout 1H2024.
Transition bonds rise
At the same time that SLBs have been falling in recent quarters, use-of-proceeds transition bonds have begun to see a rise in volume with more than US$14 billion of issuance in 1H2024. Growth in transition bond volumes brought the category nearly level with SLBs in 1H2024.
This segment similarly remains heavily concentrated, with all issuance coming from Japanese issuers in 1H2024 and the sovereign government of Japan accounting for nearly 90% of these volumes.
“While transition bonds will likely remain most popular in the Asia-Pacific region over the near term, we expect more entrants over time as the focus on transition finance continues to grow,” says Moody’s.
Greater scrutiny of sustainability-linked loans
Amid the 8% y-o-y drop in sustainable bond issuance for 1H2024, global sustainable loan volumes experienced an even steeper decline, plunging 29% y-o-y to US$286 billion, according to Environmental Finance Data.
The quarterly average of US$143 billion of sustainable loan volumes over 1H2024 fell short of the quarterly averages of US$201 billion and US$192 billion observed for full-year 2022 and 2023 respectively.
Sustainability-linked loans (SLLs) continued to account for the largest share of the sustainable loan segment in 1H2024 with US$218 billion, followed by green loans with US$62 billion. However, both of these segments trailed average volumes from last year.
Social, sustainability and transition loans totalled just US$6 billion, as these segments continued to represent a small share of the overall sustainable loan market.
SLLs will remain the key driver of overall sustainable loan volumes, says Moody’s. But the structure of the instrument continues to be intimidating. “Concerns around missed targets and potential greenwashing have discouraged some borrowers from entering the market in recent quarters.”
Moreover, reporting and verification costs may outweigh the potential price-adjustment benefit of some SLLs, which are linked to a borrower's achievement of SPTs, says Moody’s. “Lenders’ tightening standards on the ambition of SPTs and concerns around the materiality of financial adjustments could also be deterring some companies from incorporating SLLs into their financing strategies.”
An improvement in SLL quality will be important if volumes are to recover, says Moody’s. “SLLs exhibit weaker quality than other structures in our second-party opinion portfolio, with sustainability quality scores that are typically lower than those for use-of-proceeds and sustainability-linked bond and loan structures.”
Charts: Moody's Investors Service, Environmental Finance Data
