Global green bond issuance is likely to hit US$1 trillion (A$1.46 trillion) next year spurred by the European Union and Japan, according to estimates by the Climate Bonds Initiative (CBI), notwithstanding market volatility caused by the war in Ukraine, soaring energy prices and supply chain issues.
Momentum is growing rapidly to mobilise investor capital to fund the global energy transition to net-zero. In November last year, 40 per cent of all corporate bonds in Europe were ESG-themed said Sean Kidney, chief executive of the CBI, the London-based green bond certifier and research firm.
“Investors are confident the future has been decided and it is now a matter of how to pick winners and losers,” he said. “The global rebound of bond markets and with them, green bonds will drive market activity.”
“There is no shortage of investor appetite for sustainable investments, the problem is the lack of supply.”
The issuance pipeline in the next two years will be dominated by government activity led by the European Union and Japan. The EU plans to issue up to €250 billion (A$365.6 billion) of green bonds to finance the Next Generation EU program to help its post-pandemic recovery.
Meanwhile the Japanese government has proposed to issue as much as US$157 billion-equivalent (A$228.8 billion) in a new type of sovereign bond to help meet climate goals including nuclear projects. China will also have an impact on volumes after its green bond regulations were updated to meet international standards.
In Australia, the newly elected Albanese government is determined to improve on the previous Coalition government’s lacklustre climate record. It has moved to pass legislation to cut carbon emissions by 43 per cent by 2030, from up to 28 per cent.
The change of government in Australia has lifted investor sentiment “dramatically” which will have a positive impact on supply, Kidney observed.
“The drought has broken and now it remains to be seen how they make changes,” he said. “I now expect to see substantial new [green bond] issuance in the future.”
Bond volumes hit
Green and other labelled bond volumes have taken a hit amid volatile markets as issuers and investors sat on the sidelines. Total green, social, sustainability-linked and transition bonds hit US$417.8 billion (A$608.3 billion) for the first half of the year, a 27 per cent plunge compared to the previous corresponding half in 2021, according to CBI data.
But the volatility is unlikely to ease and this is reflected in asset values, said Kidney.
“Investors make money when assets produce sustainable revenues,” he said. “Volatility will be more frequent and there needs to be shock absorbers in place.”