The boom of Green, Social and Sustainability (GSS) Debt Market

Climate Bonds Initiative, an investor-focused not-for-profit, promoting large-scale investment in the low-carbon economy, has released the Sustainable Debt-Global State of the Market report, which assesses the scale and depth of the green, social, and sustainability (GSS) debt markets as of the end of 2020.

No industry or entity can be left behind in the transition to a net-zero carbon economy. The development of instruments to accommodate a broader range of issuers and activities is essential in extending the thematic bond market and can help investors to build diversified portfolios. 

Latest report of Climate Bond Initiative – Sustainable Debt-Global State of the Market – is assessing the scale and depth of the green, social, and sustainability (GSS) debt markets as of the end of 2020, encompassing established green markets and the expanding social and sustainability labels. 

According to the report, the sustainable debt market had reached a cumulative USD1.7tn at the end of 2020, with almost 10,000 instruments issued under GSS labels since 2006. Cumulative green stood at USD1.1tn, (having reached the USD1tr milestone early Dec 2020) with sustainability bonds a cumulative USD316.8bn, followed very closely by social bonds at USD315.6bn.

USD700bn worth of GSS instruments were issued in the calendar year 2020, almost double the 2019 total of USD358bn total, indicating the sharp growth in sustainable debt despite the impact of Covid.

While green remains the dominant label and was the largest source of outright capital, the social and sustainability labels grew dramatically and achieved higher volumes than all previous years combined. As a result, total issuance in 2020 was more evenly spread across the three major themes compared to prior periods. 

While green remains the dominant label and was the largest source of outright capital, the social and sustainability labels grew dramatically and achieved higher volumes than all previous years combined. As a result, total issuance in 2020 was more evenly spread across the three major themes compared to prior periods. 

An increase in the number of external reviews highlighted the emphasis investors are placing on the integrity of the green label. Most of the increase occurred in the Second Party Opinion (SPO) category. The number of Certified Climate Bonds accelerated with USD51.5bn of Certifications in 2020 and reached a cumulative total of USD154.7bn by the end of the year. 

Sovereign GSS bonds 

At the end of 2020, USD97.7bn worth of Sovereign GSS bond had been issued from 22 sources. Green remains the dominant theme, but sovereign social bonds were issued for the first time in 2020 by Chile, Ecuador and Guatemala and three sovereigns, Luxembourg, Mexico and Thailand, introduced sustainability bonds. 

Green Bonds 

The green debt market for 2020 stood at USD290bn*, recording a 9% increase compared to 2019 thanks to a strong third quarter. While the number of issuers increased, the number of instruments declined. The average size of the individual instruments issued under the green label is the smallest of the three themes, suggesting that the green debt market has broad appeal among a range of issuer types. Multiple small instruments issued by US Municipals and Fannie Mae under the green label are key contributors to this growth in the issuer base. 

  • Four-fifths of the overall green volume originated from developed markets (DM) in 2020, compared to 73% in 2019. Emerging markets (EM) accounted for 16% versus 22% the prior year, while the contribution of supranational entities (SNAT) was 4% against 5% in 2019.
  • Europe was the largest source of green debt in 2020 responsible for USD165bn or 48% of the total. 
  • North America remained broadly static on the prior year with USD61.5bn of green bonds compared to USD60bn in 2019.
  • The green bond market in China suffered from the ramifications of the COVID-19 pandemic. Overall, bonds from Chinese entities reached just USD22.4bn, or 70% of the 2019 total of USD31.4bn.
  • Together, Energy, Buildings, and Transport were respectively the three largest Use of Proceeds (UoP) categories, contributing 85% to the total in 2020. Energy and Transport, along with Land Use, were the only categories to expand in 2020. 

Sustainability Bonds 

In 2020 the amount of debt issued under the sustainability theme reached USD159.8bn, 2.3 times that of 2019. More issuers entered the market, and the size of the individual instruments was, on average, three times larger than the prior year. Individual instruments increased in size and were larger (on average) than those issued under the green or social labels. 

  • In 2020, sustainability bond issuance increased by 131% compared to 2019. Overall, supranational entities (SNAT) accounted for 63% of the volume, DM for 32%, and EM for 5%. This translates into growth for both supranationals (SNAT), and DM compared to 2019, while EM volume dropped by 9% compared to the previous year.
  • Most of the 260% growth from SNAT issuers originated from development banks, especially multilateral (MDBs). The main driver was the World Bank, but other players such as the Asian Infrastructure Investment Bank (AIIB) debuted sustainability bonds in 2020.
  • Europe enjoyed solid growth of 43% (USD31.6bn versus USD22.2bn in 2019), making up 20% of total 2020 issuance and ranking second after SNAT.
  • North America was among the regions showing the most impressive development. Issuance grew by 164% year-on-year from USD3.9bn to USD10.4bn.

Social Bonds 

The social bond market exploded in 2020, with USD249bn representing a more than 10-fold increase (1022%) year-on-year, the sharpest annual growth in any theme since the inception of the GSS debt market. The number of issuers using social labels grew by 1107% from 45 in 2019, reaching 543 in 2020 and encompassed a broader range of countries and currencies than ever before. 

The dramatic growth can be largely attributed to the effects of the COVID-19 pandemic and the increasing desire of bond issuers to address health and other social concerns in a more strategic way.

  • Issuance skyrocketed in nearly all regions in 2020. Overall, with the pandemic label as a sub-label of social bonds, all regions saw an increase in issuance apart from Africa.
  • Pandemic bonds contributed substantially to the growth and accounted for 34% of 2020 social bond issuance.
  • China with USD68bn of issuance and SNAT with USD77.7bn made the largest contributions to the 2020 issuance volume. France ranked third, with USD52.5bn and Japan fourth with a total of USD8.8bn.

Europe is home to the world’s largest green bond market, which has developed with the strong leadership of the EU. Multiple European nations have issued Sovereign GSS bonds. The EU has stated its ambition to be the first climate neutral bloc by 2050, and this objective is being pursued by connecting policy and budget, regulation, and the support of institutions including the ECB. 

The EU is the largest issuer of GSS bonds, having entered the thematic bond market in 2020 with EU SURE bonds. The presence of such a large-scale issuer of high credit quality is contributing to the creation of a transparent, liquid source of funding for entities wishing to support the transition to net zero through debt markets. 

Last week, the Climate Bonds Initiative has organized the Climate Bonds Awards to recognize the leading organizations, financial institutions and governments who have led the development of green finance markets over the past year.

This international event is marking leadership, best practice and innovation in green and sustainable finance with 23 categories encompassing bonds, loans, sukuks, social and sustainability categories and significant market developments in climate-based investment. 

2021 Climate Bonds Awards Recipients:

●      Largest External Review Provider in Number of Deals of 2020 – CICERO.Green

●      Largest Verifier for Certified Climate Bonds of 2020 – Sustainalytics

●      Largest External Review Provider of 2020 in Volume – Sustainalytics

●      Largest Green Sovereign Bond in 2020 – Germany

●      Largest Certified Climate Bond in 2020 – Société du Grand Paris

●      Largest Subnational Green Bond of 2020 – Société du Grand Paris

●      Largest Green Sukuk in 2020 – Republic of Indonesia

●      Largest Emerging Market Certified Climate Bond in 2020 – Government of Chile

●      Largest Development Bank Green Bond in 2020 – KfW

●      Largest Green Asset-Backed Security of 2020 – Freddie Mac

●      Largest Financial Corporate Green Bond of 2020 – Digital Realty Trust

●      Largest Non-Financial Corporate Green Bond in 2020 – Volkswagen

●      Green Market Pioneer: Ghana – Government of Ghana

●      Green Market Pioneer: Guernsey – Globalworth Real Estate Investments

●      Green Market Pioneer: Kazakhstan – Damu Fund

●      Green Market Pioneer: Qatar – QNB Bank

●      Sovereign Green Market Pioneer – Egypt – Arab Republic of Egypt

●      Sovereign Green Market Pioneer – Hungary

●      Sovereign Green Market Pioneer – Thailand – Kingdom of Thailand

●      Largest Sustainability Bond of 2020 – Alphabet Inc

●      Largest Social Bond in 2020 – European Union SURE

●      Largest Pandemic Response Bond in 2020 – European Union SURE

●      Transition Bond of the Year 2020 – EBRD

The growth of the GSS debts market demonstrates the role that green and sustainable finance can play in the transition to a low carbon economy and labelled instruments should become mainstream means of raising capital. 

Multiple influences that will likely continue to develop through the 2020s and shape the expansion of the labelled bond market include the harmonization of green taxonomies, the rise of the sovereign GSS bond and the establishment of transition finance.

The Sustainable Debt: Global State of the Market 2020 report is available here

Source: Climate Bonds Initiative

Post Author: Wealth Monaco