According to market participants, green bond activity will continue to be strong in 2024. After reaching record heights in 2021, green bond issuance has been more subdued over the past two years. Analysts still, however, expect significant issuance in 2024, with Europe continuing to lead the market for green bonds.
According to Dutch bank ING, global ESG bond supply will likely reach $905 billion in 2024. Having topped $1 trillion in 2021, the global supply of ESG bonds has struggled to maintain the same pace. The outlook for sovereign and municipal green bond issuance remains strong in the US, where corporate deals have tailed off. Meanwhile, reports towards the end of 2023 indicate ESG fund flows face growing headwinds, impacting their popularity.
S&P attributed the weakness of US corporates to general market hesitancy after the regional banking crisis sparked by Silicon Valley Bank’s collapse. A lack of policy clarity ahead of the election has also made some issuers take a ‘wait and see’ approach. The Inflation Reduction Act, however, is encouraging investments related to decarbonization, S&P added. Green bond issuances have increased from US automakers, energy companies, and financial institutions, among others.
Most Active Sectors in Green Bond Issuance
Despite the uncertainty, MidAmerican Energy issued $1 billion of 30-year and $350 million of 10-year green bonds in September 2023. The company has issued green bonds since 2017 and has completed six deals. PacifiCorp also issued $1.2 billion of 31-year green bonds in May 2023. Within autos, Volkswagen Leasing issued a well-received EUR2 billion multi-tranche green bond in September, offering 3, 5, and 8-year notes. Bank of America’s EUR1 billion green bond issue in June 2023 was a five-year deal. BoA has issued $14 billion across 11 ESG bond offerings in the past ten years.
In recent years, other sectors, such as media, telecom, and technology, have been active issuers. Comcast launched its first green bond in February 2023, raising $1 billion towards renewable energy projects. Verizon has launched four $1 billion green bonds since its 2019 debut, with the latest in May 2023.
Google parent Alphabet issued a $5.7 billion sustainability bond as part of a $10 billion debt offering in 2020. The issue was the largest ever launched by a company. Sustainability bonds, which allocate proceeds to both environmental uses and social initiatives, are much less prevalent than green bonds. According to ING’s research, sustainability bond activity was materially lower in 2023 but could reappear in the market in 2024.
In 2023, the most active underwriters included BNP, BoA, and JPM. Banks are likely to continue to commit substantial resources to the origination, sales and trading of green bonds for the foreseeable future as issuance activity remains robust.
Sovereign and Municipals Lead US ESG Bond Supply
For 2024, ING expects green bond activity to be led by sovereign issuance in the US dollar market, while US corporate issuance continues continues to lag. Sovereign and US municipal supply is likely to reach $125 billion in 2024, above the 2023 estimate of $121 billion. Corporate volumes will likely decline to $49 billion in 2024 from $52 billion in 2023. In Europe, ING expects EUR90 billion of corporate ESG bonds in 2024, compared to around EUR310 billion total corporate supply.
Issuances in the UAE and Saudi Arabia in 2023 have also seen the Gulf region carve out a niche in green bonds. Bloomberg reported recently that issuers in the Gulf states raised record levels of green debt in 2023, above $14 billion. Most of the issuance came from the UAE, although Saudi’s Public Investment Fund launched a $5.5 billion multi-tranche deal. While well below European and US levels, this was double the level of issuance from 2022.
Questions Over Sustainability-Linked Incentives
According to S&P, green bonds comprised 59% of all ESG bonds in 2023. As a refresh, proceeds of green bonds are used to finance environmental projects. In contrast, sustainability-linked bonds link broader climate-related goals to the issuer’s coupon over a specified period. The landscape for sustainability-linked bonds is challenging in part due to investor skepticism, S&P stated. Concerns persist about whether the bonds motivate issuers to set ambitious sustainability targets. Stakeholders question whether the structural and financial features provide enough incentive to achieve the targets.
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