Annual issuance of 950 billion US dollars in sustainable bonds

• According to the latest report by rating agency Moody's on October 30, sustainable bonds will reach a total volume of 950 billion euros by 2023.
• While there was a slight decline in the third quarter, growth of 7% was achieved in the first half of the year.
• Fewer new issuers could limit future market growth

Sustainable bonds and other sustainability-oriented debt instruments are gaining in importance worldwide. Investors are increasingly looking to align their portfolios with their financial goals and internationally recognized sustainability targets such as the Paris Agreement or the United Nations Sustainable Development Goals (SDGs). It is therefore not surprising that green bonds have grown strongly in recent years. The rating agency Moodys regularly publishes reports on sustainable bonds and provides forecasts on their development. Among other things, it states that despite the slump in the third quarter, growth is expected for the current year compared to the previous year.

Third quarter

The issue volume of green, social, sustainable and sustainable-linked bonds (GSSS) fell significantly by 26% year-on-year to USD 198 billion in the third quarter of 2023. This is due to the poor performance of the bond market as a whole in the third quarter. However, the decline was still slightly below that of the global bond market of 22%, having significantly outperformed the market in the first half of the year.

In terms of segments, green bonds were responsible for the majority of the decline in GSSS issuance in the third quarter, which fell 37% to USD 100bn after reaching a record in the first half of the year. However, the report assumes that its forecast for the full year, according to which green bond issuance will increase by 10% by 2022, remains valid. This is due to resolutions being negotiated at COP28 in Dubai.

In addition, the volume of social bonds fell by 29% to USD 42 billion in the third quarter after a strong second quarter, while the volume of sustainability bonds fell by a moderate 13% to USD 37 billion.

Forecast 2023

Despite the weaker performance in the third quarter, Moody's maintains its forecast that GSSS issuance will reach USD 950 billion in 2023 as a whole. This represents year-on-year growth of 4%, with the report highlighting an expected return to growth in the fourth quarter, driven in part by COP28-related initiatives. It is expected that the areas of action discussed, such as the operationalization of the Loss and Damage Fund established at COP27, the energy transition and the transformation of food systems, will have a positive impact on the development of sustainable bonds.

Context Total bonds

Measured against the total volume of bonds worldwide, the proportion of sustainable bonds is still relatively low. The news portal "Das Investment" states that the global bond market will reach a total volume of USD 133 trillion in 2022. The record value for sustainable bonds was USD 1.1 trillion in 2021, while USD 911 billion was issued in 2022. The slump in 2022 is mainly due to the high inflation rate and the associated interest rate hikes. This not only had an impact on the bond market as a whole, but also led to a decline in green bonds for the first time. Nevertheless, organizations such as the Climate Bonds Initiative expect significantly higher issue volumes of around USD 5 trillion per year from 2025, pointing to green growth plans in the USA, Europe and China. If these forecasts come true, sustainability bonds can be expected to grow significantly faster than the overall volume of the bond market.

Conclusion

Sustainable bonds are already very important today and are indispensable for achieving climate targets. Nevertheless, the current dampeners show that there are limits to market growth.

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