Sustainability-Linked Products: Navigating Growth and Challenges for the Future
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Sustainability-linked products will likely remain a useful tool for the future, but their growth will have to be accompanied by a general increase in company interim sustainability target setting, as well as more rigorous sustainability data reporting.
Stronger government issuance growth, but corporate ESG bond shows resilience
There is also a stark difference in issuance between the public and private sectors. The growth in the first half of 2023 is almost exclusively coming from governments, whereas all analysed sectors but the technology sector saw drops in the first half of 2023 compared to the second half of 2022.
Global sustainable finance issuance by sector
Nevertheless, despite the large role of government entities in supporting sustainable finance market growth, for ESG bonds only, corporate issuance is still showing resilience when compared with the broader bond market. Excluding sovereign, supranational, and agencies (SSAs), the share of ESG bond issuance as a percentage of total bond issuance slid slightly from 2022’s record of 10.6% to 10% for the first six months of 2023. It’s probable that this percentage can still increase for the rest of the year.
In terms of product type within different sectors, there has been a major shift in product preference towards UoP instruments as discussed earlier. This change is seen across all regions and across almost all industries, including the energy, consumer discretionary, utilities, and technology sectors we analysed below, except for industrials and healthcare, for which there are rather limited options for use of proceeds financings at this point.
For green bonds, issuance has either been sustained at a somewhat flat level or increased in the energy, consumer discretionary, and utilities sectors, while it registered a decline in the technology sector. The direction of travel in green loan issuance is more mixed, with the energy and technology sectors seeing an increase and the consumer discretionary and utilities sectors experiencing a decrease. All this has in general resulted in green products taking up a larger share of these sectors’ issuance volumes.
Issuance of sustainable finance products in selected sectors
Only around a quarter of S&P 500 companies have issued one or more sustainable finance products. S&P 500 companies in the Energy and Healthcare sectors have the lowest sustainable finance adoption rate, at 9%, whereas companies in the Utilities sector have the highest, at 83% followed by the Real Estate sector, at 65%. Hard-to-abate sectors, such as Energy, Material, and Industrials, have relatively low adoption rates. This demonstrates the dual-challenge for hard-to-abate sectors: effectively lowering emissions and showcasing the credibility of their sustainable finance products.
