Navigating Trends and Challenges: Sustainable Finance in the Midst of 2023's Market Volatility
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Big swings in 2023, but global sustainable finance remains in rude health
Sustainable finance product has seen some remarkable trends so far in 2023 – exceptional growth in green issuance contrasts with big falls in US and Asian issuance for example. We find good reasons to get more upbeat ahead, including a bounce in US issuance. Enhanced standardisation and reporting dominate positives ahead.
This year has been one of change for the global sustainable finance market. After several years of rapid growth fueled by the first waves of net-zero announcements and Covid-related sustainability financing, the market was disrupted in 2022 on the back of geopolitical tensions, uncertain economic outlooks, and higher financing costs. From that re-basing, 2023 has been a testing year for sustainable finance, partly due to caution from regional anti-ESG movements and greater Environmental, Social, and Governance scrutiny. Ahead we expect investors to continue to demand higher-quality issuance, with policies mandating sustainability data disclosure serving as an important tool to benchmark against. Despite these headwinds, issuance volumes through 2023 have been decent, and there have in fact been some quite dramatic changes within the breakdown.
Global issuance volume of 2023 possibly to exceed that of 2022
Global sustainable finance product issuance totaled $717bn in the first half of 2023. Although this volume registered a 7% year-on-year decrease, it is higher than the second half of 2022 and the whole year’s volume for 2023 still has the potential to exceed 2022’s volume. The cautious optimism is caused by multiple factors. A higher ESG data disclosure outlook can create a more easily workable environment for issuance, clean energy policies such as the US Inflation Reduction Act can continue to spur sustainability efforts, increasingly extreme weather events could motivate issuers to finance long-term climate mitigation, and sustained government efforts can increase the issuance of sovereign ESG debt.
Global issuance of sustainable finance products
EMEA remains the most resilient while Americas face headwinds
We are seeing some regional differences in terms of volume growth. The region of Europe, Middle East, and Africa (EMEA) has been the most resilient market, with issuance in the first half of 2023 recovering from the second half of 2022, back a level comparable to the first half of 2022 and second half of 2021. This is largely driven by a consistently developing sustainable finance policy environment in Europe (more on this below).
The Americas, in contrast, experienced a 21% decrease in issuance in the first half of 2023 compared to the second half of 2022, an extension of consecutive half-year drops since the second half of 2021. While likely not a determinative factor, the backdrop of anti-ESG voices has introduced disruption, uncertainty, and risks for both investors and issuers. There has in consequence been, understandably, an extra layer of questioning when it comes to issuing sustainable finance products.
One ongoing positive underpinning for the US is the Inflation Reduction Act (IRA). With $370 billion planned on energy security and climate change, the IRA has shaken up the clean energy space in the US. The tax credits under the IRA are expected to support not only relatively more established technologies such as wind, solar, electric vehicles, and nuclear, but also emerging technologies such as hydrogen and CCS. Meanwhile, there is also significant direct funding available through government agencies in grants (c.$82bn) and loans (c.$40bn). Such funding will be crucial in readying the technologies for private investment and widespread adoption.
The Asia Pacific (APAC) region has also seen a decline in the first half of 2023 compared to the previous half. Such a drop might have stemmed from a more cautious global market generally, but there can still be hope for APAC to catch up on issuance in the second half of 2023. Green products are looking to be a key growth force for the APAC market with a considerable need to finance decarbonisation as well as government support for clean energy adoption.
Global sustainable finance issuance by region
