Alan Meng
Lee Clements
Despite the plummet in issuance during the latter half of 2022, green bonds have defied expectations and made an impressive resurgence in the first quarter of this year, with quarterly issuance reaching all time high of over USD 150 billion[1]. While broader market challenges and uncertainty persist, we look at the growth dynamics for green bonds.
Not only has there been a quick rebound in absolute volumes, but the share of new green bond offerings in the overall bond market has also reached a new pinnacle, standing at 5.5% (Exhibit 1). Public sector issuers have maintained a significant presence, accounting for over one-third of all green bonds issued in the first quarter. Specifically, demonstration issuance from sovereigns returned to the scene with new players such as India and Israel tapping to the market, alongside reopening from seasoned issuers such as the Hong Kong SAR. At the same time, corporate green bonds have also demonstrated a better-than-expected recovery.
It appears that the green bond market has bottomed out as macro conditions have continued to stabilise. On the supply side, with expectations that the borrowing rate hike cycle might come to an end soon[2] and the demand in financing green transitions remaining strong[3], issuers across regions rushed to the market with delayed green borrowing plans.
Exhibit 1. Quarterly new green bond issuances
Source: Refinitiv. Municipals, collateralised and structured products are not in the scope of this research. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.
On the demand side, Q1 dedicated green bond funds have seen a surge in total net assets by 17% year-on-year (Exhibit 2), amidst the overall recuperation of the fixed-income asset class following the sell-off in 2022. Refinitiv Lipper fund data suggests that green bond funds have regained composure since the second half of last year. However, the closure of Q1 has seen a slight outflow from the highest point reached in Q4 2022, attributable to market volatility in the aftermath of the banking crisis in both the US and Switzerland. Notwithstanding the uncertainty on the broader market, if the upward trajectory of green bond fund inflows persists, it is expected that the strong demand will continue to drive more new issuances.
Exhibit 2. Total net assets of dedicated green bond funds
Source: Refinitiv's Lipper Fund Database. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.
It was noted that most Sustainable Investment (SI) indices underperformed their benchmarks in 2022, with green bonds being particularly affected. While not a complete surprise, the underperformance was mainly attributable to the influence of mounting interest rates on long-dated bonds. However, a glimmer of hope emerged in Q1, as the performance of green bonds index stabilised. Exhibit 3 demonstrates the relative performance of the FTSE World Broad Investment-Grade Green Impact Bond Index (WBIG Green) and the FTSE World Broad Investment-Grade Bond Index (WBIG). While it is too early to say for certain whether the performance will bounce back to the pre-pandemic levels, the stabilisation does offer some reassurance to investors.
Exhibit 3. Relative performance of WBIG Green vs WBIG
Source: Refinitiv, FTSE Russell. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.
While the European green bond market has maintained its stronghold in the global arena, the Asia-Pacific region has shown signs of a quick resurgence. China is driving the growth with the country remaining the largest source of green bonds in Q1. Anticipated economic measures by China's central bank, including maintaining current interest rates to support the economy[4], coupled with significant demand for infrastructure investment, could lead to ample opportunities for further growth of domestic green bonds.
Meanwhile, the ‘green subsidy race’[5] between the United States and the European Union could also have a positive impact on both the supply and demand of green bonds. Both regions have implemented generous green subsidy programs to incentivise investment and innovation in renewable technologies, which may act as a catalyst to encourage companies to increase their green capital spending and drive the demand in financing and investing. This, in turn, could create favourable conditions for green bonds.
As we have discussed in our previous blog, the fundamental growth dynamics for green bonds appear to remain resilient. If interest rates and inflation stabilise, and macro conditions continue to improve, we anticipate that the headwinds that have hindered the green bond market will rapidly transform into tailwinds, thus further propelling sustainable and transition finance activities.
[1] Municipals, collateralised and structured products are not in the scope of this research.
[2] Interest rates likely to fall to pre-Covid levels, IMF predicts - BBC News
[3] Scaling up Climate Finance for Emerging Markets and Developing Economies (imf.org)
[4] China Interest Rate Forecast For Next 5 Years (capital.com)
[5] What can we expect from the green subsidies race? 5 experts explain. | World Economic Forum (weforum.org)
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