Driving Growth: The Resilience of Green Bonds and Shifting Trends in Sustainable Finance
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Green bonds have been the driving force for growth
Of particular note, use of proceed bonds (or UoP bonds, which include green, social, and sustainability bonds) are seeing exceptional growth this year. During the first half of 2023, use of proceed bond issuance – especially green bond issuance – beat the records set in the second half of 2021. There has been mounting awareness that companies need to carefully avoid greenwashing behavior, and use of proceed bonds are gaining ground because the financing is directly tied to specific green or social projects under an issuer’s sustainable finance framework. For green bonds specifically, strong policy support across regions for energy transition technologies will provide an extra boost for issuance.
Global sustainable finance issuance by product
While green bonds have been holding strong, we are seeing issuers become more cautious with sustainability-linked products, especially sustainability-linked loans (SLLs). In the first half of 2023, SLL issuance dropped by 57% compared to the second half of 2022. The drop is partly a result of fewer large-size SLL deals. In 2022, there were 11 SLLs of at least $4bn, while in the first half of 2023, there was only one. Indeed, the drop in the first half comes to 63% when compared to the average of first half and second half issuance in 2022, while the decrease in the number of deals was slightly lower, at 59%, for the same period. In APAC, specifically, a substantial decline in the number of SLL deals is led by China and Australia, the two largest countries by volume issued. In China, one transaction in the first half of 2022 of $4.5bn accounted for 25% of the total first half SLL volume.
An interesting nuance is that there has also been a trend of smaller issuance volumes. Globally, the share of SLL deals of less than $0.05bn has gone up from 8.1% in the first half of 2019 to 28% in the first half of 2023. And the size of an issuing company is also trending smaller. In the Americas, the average revenue of corporate SLL issuers decreased in the second half of 2022 and first half of 2023 to $2.5bn and $3bn respectively, compared to an average size of $4.9bn in the second half of 2021 and first half of 2022, when issuance volume of SLLs was at a much higher level. Both of these seem to indicate that SLLs are gaining ground among smaller companies after the initial wave of adoption among large corporates.
We have also observed that for both SLLs and use of proceed bonds, there is strong product stickiness with repeat issuances as a percentage of total issuances growing over the past few years. This could partly be due to the potential negative perception regarding an issuer’s ESG ambitions from going back to vanilla financings. There is also a marked difference with UoP bond deals made up almost entirely by repeat issuers whereas new issuers make up the majority of SLLs. For many issuers, SLLs are the first step in engaging in sustainable finance as the companies develop their ESG capex plans to benchmarkable size sufficient for UoP issuances.
Share of repeat issuances from a company as a percentage of total market issuances of the same product type
