There is little doubt that 2022 was a bruising year for the entire fixed income market, including sustainable bonds.
According to figures from Environmental Finance Data, green, social, sustainability, and sustainability-linked (GSSS) bond issuance in 2022 shrank 15% to $899 billion from the record $1.05 trillion set in 2021.
After jumping to become a trillion-dollar market in 2021, therefore, challenges wrought by geopolitical conflict and inflation brought the more than a decade long growth of sustainable bond issuance to an abrupt end.
But it was also a year which revealed just how far the market has come to date – and how much further it still needs to go.
Green bonds, for example, demonstrated the enduring appeal of the oldest sustainable bond label. Whereas its younger labels all reported issuance declines in excess of 20%, the 15-year-old green bond label managed to contain issuance shrinkage to just 10% – considerably outperforming the 26% decline in total fixed income markets.
What is more, despite the turmoil of 2022, the sustainable bond market was able to bolster its share of global bond markets to more than 13.5% – including more than a 15% share in the last six months of the year. This is a striking improvement on the 12% share reported in 2021, and less than 7% share in 2020.
This is a remarkable achievement, and a fine indicator of how the sustainable bond market has come of age. A rocky 2022 has revealed the strong foundations on which the striking growth of sustainable bonds has been built in recent years. It is little wonder, therefore, that market experts forecast that
2023 will see a rebound in sustainable bond issuance – even if expectation of a fresh record being set is tempered by the tough macroeconomic backdrop.
In contrast, sustainability-linked bonds (SLBs) were perhaps the biggest disappointment for 2022. In 2021, the market surged to nearly $100 billion in issuance in 2021 – the first full year following publication of the Sustainability Linked Bond Principles in 2020. Despite reaching key milestones in 2022 – such as attracting Chile and Uruguay as debut sovereign SLB issuers – the market shrank nearly a quarter to $74 billion in 2022, however.
The reasons for this sharp reversal are complex, but it was clear that rising scrutiny of the ambition and materiality of the targets associated with these potentially transformative transition-focused instruments played a significant role in weighing down issuance.
Yet, as we will see from contributions to this report, intensifying scrutiny of how to ensure the credibility of all sustainable bond labels has also come to the fore in 2022 – and the market is responding. Despite hand-wringing around 'greenwashing' risks, that is an exciting rather than endangering prospect for the sustainable bond market in 2023 and beyond.
Indeed, perhaps the most exciting dimension of this is that 2023 is likely to see a diverse set of market participants really shine the spotlight on the importance that the necessary if nebulous 'transition' theme is set to play in sustainable bond markets. Again, contributions to this report reveal just how pervasive and powerful this theme is to many issuers, underwriters, investors and service providers.
Put simply, greater focus on defining what is and is not a credible and comprehensive transition plan will not only help provide the market develop confidence in how to structure transition instruments like SLBs better – with a commensurate boost on issuance, we hope – but also better judge all bond issuers on whether their actions are part of the solution rather than the problem.
Once again, the scale and sophistication of the fixed income markets can and should play a powerful catalytic role in driving the overall 'greening' of the economy. It is a role it has played so well to date, but 2023 needs us all to step up for the next phase of the process – making 'better' finance, even better still.
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