By Alan Meng, Sustainable Fixed Income Research Lead, Sustainable Investment Research and Lee Clements, Head of Applied Sustainable Investment Research, Global Investment Research
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[i]. 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[ii] and the demand in financing green transitions remaining strong[iii], issuers across regions rushed to the market with delayed green borrowing plans.
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.
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.
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[i], coupled with significant demand for infrastructure investment, could lead to ample opportunities for further growth of domestic green bonds.
Meanwhile, the ‘green subsidy race’[ii] 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.
For more information on green bonds and other sustainable investment assets subscribe to our blog.
[i] China Interest Rate Forecast For Next 5 Years (capital.com)
[ii] What can we expect from the green subsidies race? 5 experts explain. | World Economic Forum (weforum.org)
[i]Municipals, collateralised and structured products are not in the scope of this research.
[ii] Interest rates likely to fall to pre-Covid levels, IMF predicts - BBC News
[iii] Scaling up Climate Finance for Emerging Markets and Developing Economies (imf.org)
© 2023 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) The Yield Book Inc (“YB”) and (7) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB, BR and/or their respective licensors.