20 April 2021
Emerging market (EM) green bond issuance is expected to jump to more than $100 billion by 2023 from $40 billion in 2020, according to a report from Amundi and the International Finance Corporation (IFC), amid "highly supportive" market fundamentals.
EM green bond issuance stood at $40 billion in 2020 from more than 100 issuers. This was despite green bond issuance from China almost halving to $18 billion in 2020 from $34 billion in 2019, although it remained the single largest issuer.
The fall in Chinese issuance appears to have been driven by the disruption wrought by the Covid-19 pandemic. With more than half of its 2020 issuance occurring over the second half of the year, however, the report said this signalled a "rebound in the green bond market" in the country (see Figure 1).
Figure 1: 2020 EM green bond issuance by month
Outside of China, however, EM green bond issuance rose 21% in 2020 to $22 billion – faster than the global green bond issuance growth rate of 17%. Debut issuances were experienced from Armenia, Egypt, Georgia, Hungary, Kazakhstan, Romania, and Saudi Arabia.
The report identified an EM green bond 'greenium' of 3.4 basis points on the secondary market compared with conventional bond equivalents.
Although the report authors cautioned that the relatively small sample means drawing firm conclusions on an EM green bond premium is "premature," they believed there was scope for this pricing perk to continue to widen.
"Given the high yield nature of this segment of the market, there could be potential for the EM 'greenium' to widen," the report said. "The negative premium is mostly a result of the imbalance between the supply of green bonds and investors' demand. As the 'greenium' becomes wider, EM issuers will have greater incentive to issue green bonds, which should support the 'greening' of the EM debt market."
In addition to the pricing perks, however, the report authors believe there are a number of "highly supportive market fundamentals" that should send annual green bond issuance in EMs above the $100 billion milestone in 2023 (see Figure 2).
Figure 2: Projections for EM green bond issuance
"Robust investor appetite and increasingly supportive policy environments will continue to support the growth of green bond markets in emerging markets," said IFC global macro and market research director Jean Pierre Lacombe.
"This is now critically important, with investment for sustainable development urgently needed to lessen the pandemic's profoundly negative social and economic consequences," he added. "This is especially true as regards the damage done to efforts to reduce global poverty, where several additional years will now be needed to regain ground lost due to Covid-19."
The report highlighted the growing prominence of sustainable finance policies and growing momentum behind the EM green bond market as well as capital market development and political stability developments in EMs as among the strongest tailwinds behind the market. Of the 57 EM countries analysed in the report, 22 showed improvements across these measures in their 2020 IFC Sustainable Banking Network (SBN) scores compared to 2019 – including Indonesia, Turkey, Mexico and Brazil.
What is more, the aftermath of the pandemic could result in recovery policies that support green bond issuance.
"Recovery measures could create significant opportunities for green and sustainability-related projects by prioritising large-scale public investment in green sectors and encouraging private sector investment through supportive policies," the report said.
Attend the free "Investing without borders: accessing emerging market green and sustainability bonds" webinar organised by Environmental Finance in partnership with the IFC Green Bond Technical Assistance Programme (GB-TAP) on 21 April. Read here for more information.