The latest report from MainStreet Partners reveals that green bonds now represent 57% of the total green, social and sustainability bond issuance, reaching a record-breaking $356bn in issuance in the first half of this year.
The green, social and sustainability (GSS) bonds market has broken through the $5trn (€4.6trn) mark in cumulative issuance in the first half of this year, with green bonds leading the charge.
According to the Q3 2024 GSS Bonds Market Trends Report from MainStreet Partners, green bonds accounted for 57% of total GSS bond issuance, which reached $575bn in the first half of the year. This translates to $356bn in green bond issuances, which the authors highlighted as record-breaking.
The report attributed the success of the GSS market to investors’ interest in securities that earmarked capital towards sustainable projects, but also to the willingness of issuers to disclose information on those projects, such as the allocation of funds, attributable impact and location of projects – information that can be found in the issuers’ allocation and impact reports.
Speaking to Impact Investor, Jaime Diaz-Rio Varez, research associate at MainStreet Partners, said that in the first few years after the GSS market’s inception in 2007, issuance was relatively slow and the market remained small, but from 2020 onwards there had been significant growth not only in the number of issuances, but also in the diversity of issuers themselves.
“We have also seen a greater shift towards the green bond label over the last couple of years, which the market sees as stronger and more stable than social or sustainability-linked bonds for example,” said Diaz-Rio Varez. “Last year, we saw over $350bn in issuance. This year, we’ve already surpassed that and it looks like we could be heading towards a record-breaking year in terms of green bond issuance.”
Europe dominates GSS bonds market
Although GSS bond issuance is increasing globally, there are regional differences, with Europe leading the way, according to Diaz-Rio Varez.
“Europe still dominates the market, where the conditions for issuing GSS bonds are the most attractive. Asian issuance is stepping up again and South America is also experiencing significant growth. The United States is the exception where we have seen the pace of bond issuance slowing.”
Europe, which was the home of the world’s first green bond issued by the European Investment Bank in 2007, contributed $291bn in issuance in the first half of this year, a 13% year-on-year increase.
“Since 2007, EU countries have been aligned in applying regulatory pressure on companies to take action on the green energy transition and have tried to put the infrastructure in place to facilitate that for them,” added Diaz-Rio Varez.
Electric utilities lead green bond issuance
Globally, corporate debt issuers in the electric utilities sector returned the highest average green debt ratio with 39% of their total debt issued in the form of green bonds, which the authors said were used to finance energy transition projects.
This is followed by the real estate sector – both investment trusts (37%) and developers (29%) – water utilities (22%), major telecommunications (20%) and the semiconductor sector (18%). Combined, these sectors contribute to over 70% of GHG emissions in the EU, which the authors said made their decarbonisation a crucial step for the continent’s energy transition.
“We looked at the balance sheets of issuers to understand which issuers were greening their balance sheet the most. This showed that electric utilities had on average the highest green debt ratio, which made sense given that these companies are responsible for the majority of greenhouse gas emissions due to the nature of their activities,” said Diaz-Rio Varez, who added that the sector included both traditional utilities, which burned coal, oil or natural gas in order to generate electricity, as well as pure renewable energy players.
122 GSS bonds in breach of ESMA guidelines
In August of this year, the European Securities and Markets Authority (ESMA) published guidelines on the use of ESG or sustainability-related terminology in fund names in an effort to combat greenwashing. The aim is to prevent the use of fund names that are unfair, unclear or misleading by requiring fund managers to change the names of funds that do not align with the EU Climate Transition benchmarks or apply Paris-Aligned Benchmark exclusions or else sell off polluting assets.
The guidelines come into force on the 21 November of this year for new funds, with a transition period of an additional six months granted to existing funds.
The report found that 122 GSS bonds funds were affected by the rules and would have to choose between adjusting their portfolio positioning or a potential name change.
“The rules are quite strict. Our research found that 122 bond funds, which have 50% or more invested in GSS bonds, use terms in their naming that means they will be affected by the regulation and face the dilemma of renaming their funds if they don’t align with the benchmarks,” said Diaz-Rio Varez.
“This is costly as it means they have to change all their documentation and explain to investors why or else analyse the exposure to polluting assets of all the issuers they are invested and adjust their portfolio accordingly. Neither option is an easy thing to do.”
Carbon emissions
Other key findings from the report revealed structural improvements in sustainability-linked bonds (SLB)s, with SLB issuers targeting greenhouse gas (GHG) emissions now covering an average of 70% of their total greenhouse gas emissions with sustainability performance targets (SPTs). These are predefined targets set by companies to track progress towards sustainability performance objectives which are required when issuing via the SLB label. This marks a significant increase from 58% in 2023 and according to the report’s authors signalled a growing commitment from issuers to ambitious and transparent transition plans.
This commitment is also reflected by the fact that GHG emissions are among the most targeted KPIs by SLB issuers, with 40% of all selected KPIs targeting GHG emissions.
The report also emphasised the importance of measuring the carbon footprint of the projects financed by green bonds to further support the market, with MainStreet Partners’ own internal research noting that green bonds continued to provide a clear pathway for asset managers aiming for net-zero targets compared to their vanilla counterparts.
“We think the ESMA rules should make exceptions for green bonds given that you’re invested in ring-fenced projects rather than the day-to-day operations of a company,” said Diaz-Rio Varez.
“With information such as the nature of the projects financed, the type of technology used, the performance or impact of the project and the location of the project made readily available, we can calculate the carbon footprint of green bonds versus their vanilla counterparts and demonstrate that there is a significant difference in the carbon intensity of both instruments. This provides an additional incentive for investors to consider green bonds as part of their net zero strategies in the future.”
