Problems are afoot in Europe’s green bond market. The stand-out difficulty is the ‘greenium,’ – the premium paid by green bonds over conventional debt – has shrunk from more than 9 basis points in 2020 to around 2 basis points in July, according to the Association for Financial Markets in Europe.
This, it has been suggested, could be problematic, potentially impacting demand for such debt.
But Jennifer O’Neill, a partner at Aon, offers a more moderate response, suggesting that other factors could be at work. “A reducing greenium suggests that investors are scrutinising the particulars of each issue carefully. If the criteria are strong and credible, we believe the greenium will persist.”
This, she believes, is due to the net-zero targets which companies are setting. “It is becoming far more challenging for mainstream corporates to continue to operate and issue debt – whether green-accredited or not – without developing transition plans. We believe that investors’ baseline expectations for ESG issuance by corporates are increasing.”
Market bonding
The shrinking greenium does raise another concern: will issuers continue to come to market? The answer is simple: green bonds are still coming to the market – in vast numbers.
Global issuance of green, social, sustainability and sustainability-linked (GSSS) bonds totalled $225bn (£186bn) in the second quarter – 19% lower than in the second quarter of last year, but a modest 2% higher than the $221bn (£181bn) issued during the first quarter of this year, according to Moody’s.
The green bond market is proving resilient in the face of challenging market conditions, suggesting that the trend of issuers linking their capital market financing activities with their sustainability objectives will persist.
Matthew Kuchtyak, vice president of sustainable finance at Moody’s, is optimistic. “We continue to expect an increase in GSSS bond volumes in the second half of the year and are maintaining our revised forecast of approximately $1trn (£821bn) issuance in 2022, which would imply second-half issuance to be approximately 24% higher than the first half of the year,” he said.
Although the forecasted $1trn for 2022 would be roughly flat compared with issuance in 2021. On one level, this could be seen as a slowdown – given how rapidly the market has grown – but on another, probably a more accurate reading, is that Moody’s forecast of global issuance of GSSS bonds this year shows that green bonds do appeal, and their imminent demise is much exaggerated.
Putting the green bond picture into perspective, Kuchtyak added: “Despite global headwinds continuing to affect the bond markets, sustainable bond issuance was down less than the broader market in the first half of the year and represented 15% of global total issuance in the second quarter, the highest quarterly share on record.”
Europe goes green
Green bond issuance in Europe is even more positive. European issuers returned to the market in force in the second quarter, raising $87bn (£71bn), accounting for 64% of the global total. This total represented a substantial 82% growth in issuance from the opening three months of the year, when European green bonds totalled just $48bn (£39bn), the lowest total since the final quarter of 2020.
In fact, European issuers remain the driving force behind sustainability-linked bond volumes, accounting for a 63% share of issuance in the second quarter with those in North America and Asia Pacific following with 16% and 15%, respectively.
O’Neill added: “As issuance increases, there is a larger opportunity set for investors seeking to invest in green bonds. We see the demand for sustainable debt as structural rather than opportunistic – investors are keen to evidence their beliefs and priorities through portfolio choices.”
The trajectory of green bond issuance has been one way for some time – upwards and at a pretty rapid rate.
For example, issuance of GSSS bonds as a percentage of global bond issuance rose from around 2% at the start of 2018 to a peak of more than 12% at the end of 2021, according to Moody’s.
A bit of greenwash
There are factors on the near horizon, however, that could have a negative impact on the green bond story. These include a focus on greenwashing and closer regulatory scrutiny.
“There are many policy, regulatory and market-driven developments with implications for volumes,” Kuchtyak said. “Notable developments in recent months include the classification of some nuclear and gas projects as eligible under the EU taxonomy, updates to the Common Ground Taxonomy, a US Supreme Court ruling on greenhouse gas emissions regulation and the European Central Bank tilting its corporate bond portfolio toward greener companies.”
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