Global ESG Bond Supply: Slowing down in 2024?

Macallan Capital Group — 18.12.2023
Global ESG bond issuance is stagnating. Why?

We have witnessed enormous growth over the past seven years in ESG bond markets, reaching an issuance peak of €1 trillion of self-labelled ESG bonds in 2021. While we have been used to seeing the expansion of green, social, sustainability and sustainability-linked bonds, the reality is that, despite robust investor demand, ESG bond supply responds to external challenges in the same way as other markets: Over the past two years, with Covid-19 mitigation bond issuance expiring,  and disrupted supply chains, inflation and tighter financial conditions have led to higher funding costs.

The ESG bond market at the close of 2023 is now maturing into a very different beast, and the trends which have emerged over this current year are likely to remain in place in 2024, with a slowdown in ESG bond issuance in specific sectors amid relative stability.

ING Global Markets Research recently forecast total 2024 ESG bond issuance by sovereigns, supranationals, agencies, financial institutions and corporates of €820 billion, in line with €815 billion in 2023. This global total further breaks down into €325 billion of Euro-denominated issuance and US$240 billion (€225 billion) of US Dollar paper, with the balance of ESG bonds printed in other currencies growing slightly from €260 billion to €270 billion equivalent. Euro issuance has always led the way in ESG bond supply, and €325 billion of primary market activity would account for about 40% of total issuance in 2024. Drilling down into this total, sovereigns, supranationals and agencies will account for €160 billion or about half of total Euro issuance in 2024.

The European Union has grown into a dominant player in the ESG bond market, issuing €24.4 billion in EU green bonds in 2022, but EU issuance slowed significantly in 2023 to only €7.7 billion. Euro-denominated ESG issuance by other supranationals and agencies has reached €95 billion year-to-date, meaning levels for the entire year will likely fall behind 2022 and ING’s initial target of €131 billion, while their initial forecast for 2024 is €100 billion. Sovereigns have issued €64 billion of ESG bonds in 2023 YTD, with little chance of this growing much by year-end and expected 2024 issuance coming in slightly lower than this year at €60 billion.

Beyond these headline numbers, what are the key issues causing headwinds for the ESG bond market as we move into 2024? ING Global Markets Research highlights four main challenges:

  • Projects pipeline:

    Corporates were enthusiastic primary market issuers of ESG bonds in both 2021 and 2022, taking advantage of the lower interest rate environment to finance green projects and initiatives at attractive levels. Since it takes time to allocate proceeds to new projects, ESG issuance in 2023 and 2024 has felt the drag of the existing project pipeline;
  • Higher costs:

    The Covid-19 pandemic, the post-pandemic recovery and the war in Ukraine all fed into inflation. While central banks appear to now have this under control, higher materials costs, supply chain disruptions and higher funding costs have caused project delays and cancellations, especially in the utilities sector;
  • Reduced capex:

    Most industries have reduced their capex in 2023 in the face of higher interest rates and more expensive materials. The property sector is a case in point, where companies have focused on balance sheet management as asset valuations have fallen. For most industries, further capex contraction, and hence lower funding requirements, are likely to persist into 2024; and
  • Slower lending growth:

    As interest rates rose over the last year to combat inflationary pressures, banks’ lending has stagnated in their sustainable loan portfolios too. Nevertheless, as ESG regulations continue to evolve and investors and society as a whole push for greater sustainability and transparency from companies and banks, sustainable loan books remain well positioned to grow in comparison to less sustainable loan portfolios.

Despite the challenges facing the ESG bond market over the coming year, investor appetite remains vibrant. Inflows of capital into ESG bond investment funds have remained positive, accounting for about 13% of total Investment Grade Euro-denominated issues between October 2022 and October 2023, with fund inflows remaining positive even when other credit products underwent net outflows.

Thus, while we may be witnessing a slowdown in ESG bond issuance in 2024, the situation is relative and the overall outlook for sustainability-linked investment remains on an upward trajectory.