USD ESG Bond Market: Navigating Challenges and Opportunities in 2024

USD ESG bond market to see weaker growth momentum in the wait for policy clarity

The year ahead will be an interesting one for the USD ESG bond market, especially in the US. Given uncertain economic conditions and higher-for-longer interest rates keeping borrowing costs high, we expect to see continued caution from issuers. The ongoing anti-ESG movement adds additional complexity. The upcoming presidential election in 2024 could also lead issuers who have been keen for more policy clarity to take a ‘wait and see’ approach until there is higher medium-term ESG policy certainty.

Despite these headwinds in the USD ESG bond market, there are also several encouraging factors, such as more clean funding announced and more tax credits guidelines released under the Inflation Reduction Act (IRA).

The markets should see US$240 billion (€225bn equivalent) of green, social, sustainable and sustainability-linked bonds in the US dollar in 2024.

Given the complexities of the domestic market, we forecast that USD ESG bond market supply in the US in 2024 will be around US$100 billion, lower than our estimated 2023 level of US$103 billion and the 2022 level of US$110 billion. We expect the majority of USD-denominated ESG bonds to continue to be issued outside of the US and total $140 billion in 2024, higher than the 2023 level of US$137 billion and the 2022 level of US$131 billion. This leads to an estimated US$240 billion globally in USD-denominated ESG bond issuance, at the same level as 2023 and 2022.

Much of the growth in USD ESG bond supply will be driven by governments. In 2024, we expect USD ESG bonds from governments and US municipals to reach US$125 billion, slightly higher than our 2023 estimate of US$121 billion. Corporates, however, will likely see a decline in issuance volumes to US$49 billion in 2024, down from US$52 billion in 2023 and US$79 billion in 2022. The weaker momentum will likely be observed in both investment grade and high-yield USD ESG bonds.

The decline could be higher among corporates within the US jurisdiction than elsewhere. In 2023, the energy sector has been the only sector that has seen USD ESG bond issuance growth compared to last year (albeit at a relatively low absolute volume), partly because the IRA is incentivising more producers from the sector to finance energy transition activities. Nevertheless, in 2024, the potential risks from economic conditions, climate disclosure rule delays, and election uncertainties could soften companies’ determination to issue ESG bonds.

 

ESG bonds issued in other currencies to slightly expand

ESG bonds issued by governments, agencies, banks and corporates in the pound sterling, Japanese yen, Chinese renminbi, Canadian dollar, Swedish krona and other currencies showed robust growth between 2020 and 2022 from €30 billion equivalent to €220 billion. The segment should add another €260bn this year, according to our expectations. China has been one of the leaders in previous years but has lagged behind in 2023 so far. Including China, we forecast the “other currencies” segment to print €270 billion in 2024, showing smaller growth than in earlier years.