Global green bond issuance slows amid rising interest rates and inflation

The financing of energy transition projects experienced a lull in the first quarter of 2022.
Source: Jonathan Nafzger via Getty Images

The global green bond market is facing a lull as rising interest rates sidelined issuers and investors in the first quarter of 2022.

While most central banks are raising interest rates to tame inflationary pressures, funding costs for green bond issuers have risen and created uncertainty for investors, analysts said.

“The rising rate environment is hurting bond yields and primary issuance, and because the higher credit quality of the green bond market makes it highly sensitive to changes in interest rates, the green bond market is down,” said Mitch Reznick, head of the sustainable fixed bond. income for Federated Hermes, an investment manager.

Global green bond issuance in the three months to March 31 fell 34.63% year-on-year to $83.8 billion, according to Climate Bonds Initiative, or CBI. .

Data covers obligations aligned with CBI definitions. An additional $21.29 billion of green bonds issued globally in the first quarter of 2022 have been flagged by the CBI as unaligned, while $28.26 billion have yet to be categorized.

The weak first quarter ended a multi-year streak of growth in the global green bond market, propelled by zero net commitments from many countries. Uncertainty about the global economic outlook due to rising inflationary pressures and the impact of the Russian invasion of Ukraine affected the financing of energy transition projects. Interest rates are expected to firm after unprecedented easing by many central banks to support pandemic-hit economies.

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Europe prefers sustainability bonds

Europe, the region that contributes the most green debt globally, sold $45.8 billion in green bonds in the first quarter, up from $60.16 billion a year ago, data shows. of the CBI. Germany and France lead the way, with $15.9 billion and $7.6 billion in green bond issuance, respectively.

Like green bond issuance begins to decline, European issuers have started to favor sustainability bonds, analysts said. Unlike traditional green bonds, these are not confined to specific environmental or social projects, thus offering more flexibility to issuers.

“Growth in sustainable debt issuance is broad based, but France, Germany and Italy have led the way in 2022,” said Sam Morton, head of European investment grade research at Invesco Fixed Income, to S&P Global Market Intelligence.

Corporate sustainability debt issuance, which is expected to increase in 2022, will be driven by an increased supply of sustainability-related bonds, Morton said.

S&P Global Ratings expects sustainability bonds to be the fastest growing subset of environmental, social and governance bonds. In 2021, $92 billion in sustainability-related bonds were issued, representing a 989% increase over the previous year, according to Ratings. Green bonds, at $532 billion in 2021, are up 87%.

Still, analysts expect Europe to remain the key region driving green bond market growth globally.

“Europe has been the main driver of the development and growth of the green bond market, and we don’t see that changing in 2022,” said Trevor Allen, head of sustainability research at Markets 360, BNP. Paribas Corporate and Institutional Banking. Markets 360 is the strategy and market economy division of BNP Paribas.

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Demand exceeds supply in Asia-Pacific

In the Asia-Pacific region, demand is outstripping supply for green bonds, said Clifford Lee, global head of fixed income at DBS Bank. Asian investors typically consume bonds issued outside the region and there isn’t enough supply to infiltrate US and European markets most of the time, Lee said.

Asia-Pacific, the largest growth region for green debt in 2021, sold $30.63 billion in green bonds in the first quarter, up from $34.23 billion in the same period last year, according to CBI data.

The second quarter could see more green bond issuance in Asia-Pacific after some issuance plans were postponed until the end of the first quarter due to market conditions, said Antoine Rose, Head of Sustainable Banking for Asia-Pacific and the Middle East at Crédit Agricole Corporate and Investment Banking.

Central bank rate hikes make it harder for issuers and investors to understand when to issue bonds and when to invest, DBS Bank’s Lee said.

“Once the market can accept the new, more stable normal [economy]then we can continue at the pace of growth,” Lee said.

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China was the top issuer of green debt in the first quarter of 2022 with $21.4 billion in green bonds issued, followed by Germany and France, according to CBI. China is the only major global economy still eyeing more easing as growth slows, driven by a high number of COVID-19 infections.

“China remains the main source of emissions [of green bonds]but we are seeing more activity, more in-depth discussion of green bond issuance or social bond issuance from Southeast Asia,” Lee said.

Japan’s green bond issuance, ranked seventh in the global market in the first quarter, could lose momentum in the coming months due to soaring interest rates and the continued invasion of Ukraine by Russia, analysts said.

“The outlook for interest rates is deeply uncertain,” said Mana Nakazora, chief ESG strategist at BNP Paribas in Japan. “Issuers are adopting a wait-and-see attitude” towards the show.

Nakazora expects Japan’s 2022 green bond issuance to be below last year’s levels.

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