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- The corporate green bond renaissance
- Green bonds, social bonds, sustainability bonds and sustainability-linked bonds have grown a combined 43% CAGR between 2014 and 2023 to represent approximately 14% of the global fixed income market.
- Green bonds are the most popular segment of sustainable debt instruments in the fixed income universe, with issuance accounting for 55% of the entire sustainable bond market. The next largest category being sustainability bonds at 20%.
- Within the green bond universe, corporate green bonds capture approximately half of the total ESG-labelled universe. We expect this dominance to persist as green bonds become an important instrument for companies’ climate transition planning and target setting to achieve net zero.
- The lion’s share of green bond proceeds is directed towards renewable energy, green buildings, energy efficiency and clean transportation projects. Lagging far behind is the use of proceeds for water, land use, biodiversity, the circular economy and climate adaptation projects. This imbalance may be rectified as governments, particularly in Europe, promote nature restoration and the circular economy.
- Two of the most important factors driving the green premium, whereby a green bond is priced with a yield below the conventional bond, is the credibility of the green bond and the issuer. The EU Green Bond Standard which applies from this December, should help to strengthen credibility within the green bond market and hence encourage the appearance and persistence of a green premium, or greenium.
- Large carbon emitting companies in Europe are often faced with higher borrowing costs, which can be mitigated when these companies invest in activities that promote sustainability. This would imply a financial incentive for corporates to adopt climate transition plans, set targets for net zero and possibly issue green bonds.
- For investors, there is evidence that green bond issuance can not only increase institutional investor appeal for the issuer, but that it can also benefit equity returns of the issuer.
Introduction
In this paper, we focus on corporate green bond issuances to show how this segment has become one of the most important parts of the ESG-labelled fixed income universe. This paper is organised into three sections. The first section examines the current market landscape and specifically the characteristics of corporate green bonds. The second section explores the distinct yield characteristics of green bonds relative to conventional bonds. The final section assesses how standards are being developed to enhance the integrity of green debt instruments.
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1 / Market landscape
Green bonds dominate the sustainability bond universe
The sustainable bond market encompasses green bonds, social bonds, sustainability bonds and sustainability-linked bonds. Combined their issuance has grown by 43% CAGR between 2014 and 2023 to represent approximately 14% of the global fixed income market.[1] While the Covid-19 pandemic led to a pick-up in social bond issuance by public sector entities in response to the health emergency, green bonds continue to constitute around 50% of the total sustainable finance debt market[2].Â
Corporates make up the lion’s share of green bond issuers
While corporates have dominated the issuance of green bonds over the past few years, this was not always the case. From the first green bond issuance in 2007, sovereigns and supra-nationals such as the World Bank were typically leading the way. According to a recent IMF study[3], the number and size of corporate green bond issuance in a country increases after a sovereign bond issue. In addition, where a sovereign bond issuance occurs, it can improve the quality of green verification standards in the corporate bond market. This then supports best practice when it comes to green bond reporting and verification. In addition, sovereign bond issuance can also improve liquidity and yield spreads for corporate bonds.
Today, corporates account for around a half of the annual issuance of green bonds,[2] Figure 2. We expect the dominance of corporate green bond issuance to persist as more and more companies set climate transition plans which will need to be funded, possibly through green bonds. Such transition plans outline how a company is aligning its business operations with a 1.5°C pathway, which includes its strategy to reduce greenhouse gas emissions using science-based targets. According to CDP,[4] the number of companies setting climate transition plans has grown to just over 5,900 in 2023, an increase of 44% over the previous year with approximately 8,200 more companies planning to create a climate transition plan by 2025.
