The world’s green, social, sustainability and sustainability-linked (GSSS) bonds totalled US$821.1 billion ($1.08 trillion) as of Sept 30, already surpassing 2023’s full-year tally of US$674.4 billion.
Also known as labelled bonds, issuances are up 54% compared to year-to-date issuance as of Sept 30, 2023. According to OCBC Global Markets Credit Research, these issuances are ahead of market expectations from earlier in the year, which had forecast US$1 trillion in issuances this year.
In comparison, Asia dollar ex-Japan G3 currency bond issuance is up just 33% y-o-y while US corporate bond issuance is up 40% y-o-y, says OCBC analyst Andrew Wong. “This implies a relative outperformance in the sustainable finance bond issuance space so far in 2024 compared to the overall bond market.”
In 9M2024, green bonds remained by far the highest sought-after sustainable finance instrument, with some US$462.4 billion in issuances among corporates and governments worldwide. Sustainability bonds were the next most popular category, followed by social bonds and sustainability-linked bonds (SLBs), in that order.
Wong notes that Qatar made a “significant move” towards green bonds, issuing a bond offering split into two tranches — a US$1 billion five-year bond and a US$1.5 billion 10-year bond — both with premiums above US Treasury bonds.
See also: Global sustainable bond volumes bounced back in 1Q2024; Moody’s keeps US$950 bil full-year forecast
Wong says this aligns with Qatar’s “broader agenda” of addressing climate change and promoting sustainable development, despite its heavy reliance on the hydrocarbon sector. Qatar aims to reduce greenhouse gas emissions by 25% by 2030.
SLBs, however, “remain under pressure” with issuances on a downward trend, notes Wong. SLBs made up just 4% of labelled bonds in 1H2024, and their issuance was down 45% y-o-y, notes MSCI ESG Research.
Unlike “use-of-proceeds” bonds, such as green, social and sustainability bonds, issuers of SLBs do not have to channel all the proceeds to predetermined green or social projects. Instead, issuers must set sustainability performance targets (SPTs), which, in turn, generally affect the characteristics of the bond, typically the coupon rate. For example, an issuer that fails to meet its SPTs will have to pay a higher coupon rate to bondholders.
With SLBs, issuers enjoy the flexibility to align KPIs with their companies’ overall strategy, rather than tying the bond’s proceeds to eligible projects, writes a team of MSCI Research analysts in an October report. “However, many SLBs have been a target of criticism, mostly related to their relatively unambitious KPIs combined with mild penalties (usually a coupon step-up) for not meeting them.”
Corporate ESG leaders
In 1H2024, 216 unique corporate issuers brought a combined US$250 billion worth of labelled bonds to the market. Corporate issuers were responsible for 56% of new issuance during 1H2024, with the rest from sovereigns, supranationals and agencies. There were more than 900 unique corporate issuers with outstanding labelled debt in the market.
Among issuers with an MSCI ESG Rating, ESG leaders — or those with an MSCI ESG Rating of AAA or AA — issued 49% of all new labelled bonds in 1H2024, while ESG laggards — with a rating of B or CCC — only issued 4%. “In line with the longer-term trend, new issuance among the ESG laggards came almost entirely from B-rated issuers, with minimal activity from CCC-rated issuers,” notes MSCI.
The dominance of issuers with high MSCI ESG Ratings in the labelled bond market suggests a positive correlation between the issuance of such instruments and the issuers’ ESG profiles, say the MSCI analysts. “While labelled bond issuance does not directly lift the issuer’s MSCI ESG Rating — that is, it is not one of the scored indicators within the MSCI ESG Ratings methodology — proper earmarking and use-of-proceeds to deliver on green, social or sustainability-related goals could contribute to ESG profile improvement.”
According to the analysts, investors have “ample opportunities” to gain exposure to labelled bonds without compromising the credit or ESG quality of their portfolios, as 49% of the outstanding labelled bonds were investment-grade, or those with credit quality grade of BBB or higher; and issued by ESG leaders.
On performance, MSCI says most labelled bonds “do not differ markedly” in their credit characteristics from conventional bonds from the same issuers. The exceptions are instruments bearing SPTs and those that provide direct exposure to funded projects, as these distance the bond from the issuer’s credit quality, note analysts.
The performance of labelled bonds, despite their distinctions from conventional bonds, has been “primarily driven” by key fixed income risk and return drivers, such as interest rate sensitivity, currency fluctuations and credit risk, they add. “Therefore, while investors may scrutinise bonds’ sustainability credentials and their impact on performance, the traditional performance drivers of fixed income instruments continue to play a decisive role.”
Charts: Bloomberg, OCBC Credit Research
