Market Overview 

Through August 31, 2024, Barclays reported sustainable bond¹ issuance across asset classes year-to-date (YTD) is broadly higher globally, with trends outside the U.S. being more consistent. Total issuance was $720 billion, up 12 percent from $643 billion for the same period in 2023. If issuance remains at the same annualized pace, it is estimated that the market could surpass Moody’s projection of $950 billion for 2024. The growth is attributed to an increase in issuance across all three label categories (green, social and sustainable) offset by a decrease in sustainability-linked bond (SLB) issues.² As Environmental Finance noted, SLBs issuance in August hit an all-time monthly low. It is the weakest performance since the market saw its first initial growth in September 2020 and is attributed to lingering credibility concerns about the instrument (See Figure 1).

Sustainable bond supply from U.S.-based corporate issuers of $224 billion through August 2024 is 0.6 percent lower than the same period in 2023, per Barclays. Sustainable bond supply in the municipal market during the same period did not keep pace with the rest of the municipal market, although sustainable muni issuance was up year over year. Some parts of the securitized market saw sustainable bond increases, while increases overseas were more broadly distributed across sectors.

Corporate sustainable bonds issued in the first half of 2024 are tracking between levels during the same period in 2021 and 2023, Barclays data showed. SLBs, which tie the interest rate on the bond to achievement of certain sustainability goals during the term of the bond, have seen lower issuance year-over-year (Y/Y). In the municipal market, sustainable bond issuance as a share of the total declined to 5.4% percent for the year-to-date period through August 2024.

In securitized markets, Barclays said that overall sustainable opportunities in asset-backed securities (ABS) was limited. Federal National Mortgage Association (Fannie Mae) sustainable bond issuance remained on pace, and single asset, single borrower (SASB) issuance exceeded Barclay’s initial expectations.

Corporate, Municipal, and Securitized Labelled Bond Issuance: Diverging Patterns

Corporate: Through August 2024 versus the same period in the prior year, the market saw a decrease in issuance from the financial and industrial sectors that was partially offset by an increase in sustainable bond deals from utilities. Overall, total issuance was essentially flat at $226.1 billion in 2023 compared to $224.7 billion in 2024 (See Figure 2). 

Looking at the breakdown between labelled and sustainability linked bond issuance, supply of sustainable bonds increased Y/Y by 8 percent while SLB issuance contracted by 46 percent (See Figure 3).

In terms of U.S. dollar (USD) corporate sustainable bonds, for the year-to-date period through August 2024, total issuance amounted to $43 billion, almost double from $23 billion in 2023. As a result, corporate USD issuance rose from 10 percent of total global sustainable bond issuance in 2023 to 20 percent in 2024 (See Figure 4.)

Municipal: Total municipal bond issuance of about $334.6 billion YTD through August 31, according to The Bond Buyer, which was more than 34 percent higher than $249 billion issued in the same period last year. Sustainable supply did not keep pace with the rest of the municipal market, with Morgan Stanley reporting that $18.2 billion of sustainable municipal bonds were issued through August and sustainable issuance as a share of the total declining to 5.4 percent, less than 2023's share of 7.6 percent. If issuance continues this pace for the remainder of 2024, it would be the first year in five years that municipal sustainable bond issuance as a percentage of the total municipal market did not increase. (See Figure 5.)

Barclays attributed the decline in municipal sustainable bond issuance to several factors such as increased dispersion of sustainable bond issuance among “blue” (e.g.: New York, California, Connecticut, Massachusetts) and “red” states (e.g.: Texas, Florida), where climate-related risks may not be priced in credit spreads, social impacts at times challenging to measure, and municipalities that do not recognize enough economic benefit from sustainable bond issuance. In addition, Barclays reported, many issuers and investors believe that large portions of the muni market are inherently sustainable, seeing no reason to assign green, social or sustainability labels to newly issued bonds. Finally, the Inflation Reduction Act included about $370 billion in funds allocated toward climate and energy, which already are being deployed, partially alleviating some funding needs. 

Securitized: Barclays took note of issuance in solar ABS and other sustainable ABS sectors such as property assessed clean energy (PACE), rate reduction, and digital infrastructure, but overall ESG opportunities in ABS continue to be limited. Most of the sustainable paper in commercial mortgage-backed securities (CMBS) consists of agency- or government-guaranteed multifamily loans, issued by Federal Home Loan Mortgage Corporation (Freddie Mac), Fannie Mae, or Government National Mortgage Association (Ginnie Mae). In the private-label space, some SASB paper is also labelled or eligible. 

Barclays reported labelled bond issuance in bond market sectors outside the U.S.

Sovereign, supranational, and agency bonds (SSAs): The total amount of SSA bonds outstanding in green social and sustainability format surpassed €1 trillion (equivalent to $1.1 trillion), according to Barclays. This year started strong, with about $76 billion of SSAs issued in sustainable format in January. By the end of August, about $438 billion had been issued, $81 billion more than the same period in 2023. 

Other Developments in the Sustainable Bond Market

Two additional and somewhat esoteric types of financial transactions—debt-for-nature swaps and blue bonds—are similar to more common sustainable bonds in their intention to advance sustainability efforts.

Debt-for-nature swaps, a concept introduced more than 35 years ago, are financial transactions in which a portion of a developing nation's foreign debt is forgiven in exchange for local investments in environmental conservation measures. The swaps are a way to address the problems of developing-nation indebtedness and its negative impact on the environment.

Debt-for-nature swaps allow countries to free up fiscal resources to build resilience against the climate crisis and take action to protect nature, while still focusing on other development priorities without straining fiscal resources. 

According to the World Economic Forum, debt-for-nature swaps could provide $100 billion to restore nature and help countries adapt to climate change. Debt-for-nature swaps are gaining ground among severely indebted countries. For example, Ecuador issued debt-for-nature swaps to refinance $1.6 billion of government bonds at a discounted rate intended to protect part of the Amazon rainforest. Debt-for-nature bonds also have been targeted to conserve coral reefs in Indonesia.

Another development in the sustainable bond market we are monitoring is the issuance of blue bonds. Blue bonds are issued to finance initiatives such as providing access to clean water and sanitation, as well as promoting marine conservation and biodiversity, including sustainable marine and fisheries projects. For example, blue bonds were first introduced by the Republic of Seychelles, which launched the world’s first sovereign blue bond. This bond raised $15 million to advance the island state’s blue economy.

Blue bonds are an interesting segment of the sustainable bond market, and their issuance could rise as more countries and organizations recognize the importance of financing sustainable marine and fisheries projects.

[1] This report discusses issuance of sustainable bonds, including green, social, sustainable, and sustainability-linked bonds.

[2] Sustainability-linked bonds (SLBs) are fixed income instruments that tie financial and/or structural characteristics to predefined sustainability objectives. The objectives are measured through predefined Key Performance Indicators and evaluated against predefined Sustainability Performance Targets. Financial or structural characteristics of SLBs, for example, interest rates, are conditioned on whether or not the issuer meets predetermined key performance indicators (KPIs). In comparison, bonds with proceeds used to finance or re-finance green projects, social projects, or a combination of both are called green, social and/or sustainability bonds, respectively, and are not to be confused with SLBs.

BCAI-09182024-zkvpupvt (9/23/2024)

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