The recent stratospheric ascent of green bonds has arrived at a crucial moment for fixed income investors who are committed to combating climate change. With a market size of EUR 1.1 trillion, urgent worldwide efforts to decrease greenhouse gas emissions in accordance with the Paris Agreement and to contribute to the achievement of the Sustainable Development Goals (SDGs) by 2030 may now be advanced.
The green bond market is also large and diversified enough to provide all investors the chance to profit from both good profits and a beneficial environmental effect.
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The size, liquidity, and performance of the market have attracted institutional investors in recent years, and their involvement will help drive the market’s ongoing fast rise.
Green bonds are becoming more popular
Governments all around the globe are increasing the issuing of green bonds to support initiatives like green infrastructure and renewable energy, which is the supply side. Encouraged by the existence of common standards and definitions like the European Union’s taxonomy for sustainable activities and the Green Bond Principles endorsed by the International Capital Market Association, new corporate issuers such as electronics manufacturers and shipping companies have also entered the market.
Due to their rapid expansion and widening product selection, green bonds now provide a competitive alternative to traditional fixed income securities. They often provide comparable or greater financial performance in addition to having a real, beneficial influence on the environment. Additionally, they are monitored at the issuer and project levels, giving investors access to information on how their money is spent and the effects it has.
Rapid market expansion of green bonds
The green bond market has advanced considerably in a short period of time. The European Investment Bank, the financing arm of the EU, issued the first green bond in 2007. The World Bank followed it a year later. The first green corporate bond was issued by Swedish real estate firm Vasakronan in 2013.
When starting out slowly, the market grew quickly after the ICMA published the Green Bond Principles in 2014. As governments and businesses banded together to combat climate change, the signing of the Paris Agreement and the approval of the UN SDGs the following year sparked additional growth. The market has grown by an average of 60% year since 2015.
By 2021, green bonds had surpassed both global convertible bonds and European high-yield bonds as a staple of the fixed income market.
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And more fast expansion is predicted. Although there was a decline in the first quarter compared to the first three months of the previous year, new issuance nonetheless reached EUR 440 billion last year, and we anticipate that this amount will soar to EUR 600 billion in 2022.
The “bounce-back” of issuance delayed in 2020 by the Covid-19 epidemic and ensuing disruption to bond markets was a major factor boosting the market for green bonds last year. With their first-ever sovereign green bond offerings, governments in nations like Italy, Spain, and the UK also contributed to the market’s momentum. The implementation of the EU taxonomy, which establishes green standards for initiatives and commercial endeavors, has been crucial in promoting investment. In accordance with its Next Generation EU recovery program, the EU recently started issuing green bonds.
Europe continues to be the driving force behind the expansion of green bonds. We anticipate that the EU will issue between 50 and 75 billion euros in green bonds in 2022 to fund Next Generation EU, however this estimate may increase if the EU issues bonds more quickly. By the end of 2026, the EU expects to have issued up to EUR 250 billion in green bonds, making it the biggest green bond issuer in the world.
In January 2022, Denmark issued fresh debt worth DKK 5 billion for the first time in order to finance the nation’s energy transformation. In 2022, the issue of green bonds might total DKK 15 billion.
Additionally, the UK intends to increase issuance in the fiscal year 2022-2023 with GBP 10 billion of green gilts. The Treasury will strengthen two current green gilts rather than issue new bonds in order to make sure their liquidity matches that of other benchmark bonds.
With its first CAD 5 billion green bond to fund investments in green infrastructure and other environmental initiatives, Canada joined the market outside of Europe in March 2022. Chile, Egypt, and Indonesia are prepared to reenter the market, while Colombia, India, and Singapore are contemplating offering green bonds in 2022. ICMA noted that investors will profit from more diversity and a wider selection of investment possibilities thanks to the market’s fast growth.
Push for global climate
Governments will make stronger promises to enhance their environmental policies as a result of climate measures, which will also boost the issue of green bonds. Nearly 76 percent of global greenhouse gas emissions, including those from China, the US, and the EU, are covered by net-zero objectives established by more than 70 nations. New objectives on biodiversity, coal use, and methane emissions were unveiled during the COP26 UN Climate Change Conference in 2021.
Changes to regulations should eventually be made to reflect these efforts. Investors will likely ask companies for more specific details about their efforts to combat deforestation and phase out fossil fuels.
Benefits that come along with regulation
Increased disclosure and openness will be required by regulation, which will also strengthen and expand the market. Asset managers and other players in the financial system in Europe are ramping up reporting to comply with the Sustainable Finance Disclosure Regulation (SFDR), which includes specific information on how they mitigate the potential negative environmental effects of their investments.
Corporates generally have to comply with stricter reporting regulations. About 11,700 big corporations in Europe are required to provide environmental, social, and governance (ESG) data under the Non-Financial Reporting Directive. This mandate would be extended to around 50,000 enterprises under the Corporate Sustainability Reporting Directive, the NFRD’s planned replacement. The Securities and Exchange Commission in the US is also debating requiring public corporations to disclose climate-risk information.
As you can see, investing in green bonds will surely be beneficial. By encouraging businesses to adopt more sustainable business models, these legislative actions should increase the range of investments available to green bond holders. These rules need to increase the credibility of the sustainable investing market, including green bonds, and encourage an increase in investment by enhancing the openness and comparability.