Global sales of corporate bonds focusing on environmental, social, and governance (ESG) aims are predicted to rebound and surpass $460 billion this year, according to Barclays. The ESG bond market experienced its first slump in 2022, when higher interest rates impacted credit markets and corporate bond issuances slowed.
In 2022, ESG bond volumes fell by 22%, with corporate ESG bond issuance decreasing to $362 billion from $461 billion the previous year. This reduction was largely due to the significant increase in borrowing costs caused by aggressive monetary tightening measures taken by global central banks to combat inflation. However, Barclays anticipates that ESG bond sales will increase by 30% this year, returning to nearly the same levels as in 2021. This resurgence is expected to be driven predominantly by green bonds.
According to the International Energy Agency, the transition to a planet’s energy system that is free from greenhouse gas emitting fuels will cost approximately $2 trillion per year by 2030. In response to this, various companies and banks have developed new financial instruments to support the transition.
Green bonds have remained the dominant ESG debt option, outperforming the newer sustainability-linked bonds, which impose penalties on borrowers who fail to meet specific targets. Barclays stated that companies could obtain cheaper financing through green bonds, enhancing their appeal even further amid investor skepticism over the key performance indicators used in less mature sustainability-linked securities.
However, the growth of green bonds may have been hindered by investor concerns over greenwashing in the market. There has been a significant decrease in the issuance of sustainability-linked bonds (SLBs), falling to $60 billion from $95 billion in 2021.
Investment Insight
Investors seeking to put their money into sustainable and socially responsible ventures will find the anticipated surge in green bond issuances an exciting opportunity. The combination of strong demand for green projects and the relative stability offered by green bonds, compared to other ESG debt options, makes them an attractive investment. Companies seeking to fund decarbonization initiatives are likely to increasingly rely on green bonds, providing a steady stream of opportunities for investors in the ESG space.
However, investors should be aware of potential greenwashing risks, where the environmental benefits of a project or company are overstated. Thorough due diligence will be crucial to ensure that the green bond investments truly align with ESG goals.