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Sustainable finance debt issuance suffered declines across bond categories in 2022. Alex Janiaud reports.

Sustainable finance bond issuances fell by more than a quarter in 2022, marking their first ever year-on-year drop. According to financial data provider Refinitiv, last year's issuances totalled $744.3bn, a fall of 26% compared with 2021. 

In a challenging year for sustainable finance, green bond issuance hit a two-year low at $390.3bn, a 19% fall from the previous year. Social bond issuance almost halved to $105bn – although in the last three months of 2022, issuance increased by 37% compared with the third quarter.

However, while sustainability bond volumes fell 21% to $149bn in 2022, the number of this type of bonds (which combine green and social projects) rose a fifth compared with the previous year. This was a record high.

“We attribute the decline in issuance to volatile primary market conditions, which led issuers and investors to favour vanilla structures that have less need for lengthy roadshows which could derail execution,” said Sam Morton, Invesco’s head of European investment grade research.

“Given the material widening in credit spreads that occurred in 2022, the relative cost of adding labelled bonds to a portfolio has declined. In our view, this lower cost to ‘go green’ should support the growth of the labelled asset class in 2023,” he added.

Issuers reluctant to come to market

Sustainable finance remains a mostly European market. Last year, European issuers held 53% of the market share for sustainable finance bonds, far above the Asia-Pacific region’s 23% share and the Americas’ 18% share.

Last year’s decline in sustainable finance bonds was in keeping with a tortuous 12 months for fixed income. In the UK alone, investment grade sterling-denominated corporate bonds delivered returns of -19.5% in 2022, against a backdrop of rising inflation and tightening monetary policy, according to Fidelity International. Interest rate rises are typically followed by falls in bond prices.

“Issuers, obviously, were reluctant to come to the market,” said Caroline Harrison, Climate Bonds Initiatives’ head of market intelligence research.

Bonds issued by companies made up three-fifths of sustainable bonds by issuer type, sitting at $437.6bn versus $293.7bn of agency or sovereign sustainable bonds. Both types dropped from 2021 levels.

The slowdown was particularly felt in the US, where environmental, social and governance (ESG)-labelled bond markets “remain underdeveloped compared to Europe”, said Canada Life Asset Management senior fund manager David Arnaud.

Nearly a third of bonds issued in Europe last year had an ESG stamp, he observed, compared to less than 10% of bonds issued in the US. “The reasons are multiple but a more advanced regulation in Europe and a lack of dedicated ESG funds in the US have played a large role,” he added.

France sat atop Refinitiv’s league table for issuers, generating proceeds of $60.2m. This was almost double those made by the World Bank and the European Union, which came second and third respectively. Both generated $33m in proceeds last year.

Indian debut

The sovereign market may yet be buoyed by the arrival of new participants in 2023. India will make its first green bond issuance, worth Rs160bn ($1.95bn), on January 25 and February 9, according to Bloomberg.

Mergers and acquisitions activity linked to sustainable companies, meanwhile, presented a mixed picture last year, having fallen by 24% to $159.3bn – representing a two-year low. The market conditions for raising finance were the hardest they had been “for a decade”, according to Deloitte director Louise Harvey. Rising interest rates have depressed debt capacity, she said in a corporate outlook of 2023.

The number of deals, however, reached a record full-year high of 1511, representing an 11% increase. Refinitiv earmarked Exelon’s spin-off of power generation subsidiary Constellation Energy in January 2022 as the year’s largest ‘sustainable’ M&A deal, which it reported was worth $21.7m.

This article first appeared in Sustainable Views, a service by the Financial Times.


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