Public sector borrowers lead strong start to the year for ESG-labelled debt

Israel makes market debut as India prepares to issue, while airport green bonds and airline SLBs spark controversy.

Israel made its green bond debut this week in a busy market for ESG issuance as a series of public sector borrowers came back to market, while on the corporate side some early deals attracted scrutiny over their quality.

Israel’s finance ministry said that more than 200 investors from 35 countries had taken part in the $2 billion deal, with “high demand” from Asian investors.

Senior deputy accountant general Gil Cohen said the issuance “supports the government’s debt management strategy, and in particular the diversification of financing sources and the expansion of the investor base”.

Hong Kong, Slovenia, Ireland and the Philippines all returned to the market.

In the largest ESG bond ever issued in Asia, Hong Kong raised $5.75 billion equivalent from an eight-tranche deal across three currencies. Slovenia raised €1.25 billion from a new sustainability bond under its revised framework, which is now aligned with the substantial contribution criteria in the EU taxonomy “as far as possible”.

Ireland raised €3.5 billion from its second green bond, almost 70 percent of which was allocated to ESG investors, while the Philippines also issued a 25-year sustainability bond.

The deals emerged in a crowded market, with non-labelled structures across currencies and geographies seeing high levels of activity.

According to data from Dealogic, corporates have already raised $63.7 billion in the US this year, a significant jump from $36.6 billion from the last five weeks of 2022. However, this is still lower than the same period last year.

Germany’s KfW had reached 15 percent of its annual funding volume by Wednesday and the World Bank has already made four visits across several currencies.

All four ESG issuers saw high levels of oversubscription. BNP Paribas, which acted as sustainability structuring adviser for Slovenia, said the orderbook was the highest for any CEE deal since the start of 2022, while Hong Kong doubled the size of its two Renminbi tranches to meet demand from Chinese investors, mainly banks.

Strong start

Trisha Taneja, global head of ESG capital markets and advisory at Deutsche Bank, said the market for SSA and financial labelled bonds had seen a “fairly strong start” to the year. Alongside the sovereign issuers, a number of multilaterals – including the EIB – have come to market, as well as Berlin Hyp and DZ Hyp.

Agnes Gourc, head of sustainable capital markets at BNP Paribas, agreed. “Pretty much every single day, even just looking at EMEA we have at least one or two deals,” she said. “It’s nice to be in an opening of the year that is really going very well.

“The dedicated green bond funds now have deals coming that they can invest in. It’s a really good market, everyone has issued. In Europe you’ve had SSAs including some debut sovereigns, you’ve had FIG, you’ve had investment grade.”

Gourc pointed to an sustainability-linked bond (SLB) issued by Italian tyre company Pirelli, which BNP Paribas acted as joint global coordinator and sustainability structurer for. “We did an investor roadshow virtually, and despite the very busy market there was a lot of interest in taking those meetings,” she said.

Taneja noted, however, that ESG issuance in the leveraged finance and high yield space was weaker than at this point in previous years. “In 2021 we were actually seeing a lot of activity in the leveraged finance and high yield space around this time and it was a very strong start,” she said. This year, however, higher rates are driving “not the closure, but the muted level of activity” in the space.

Looking ahead to the rest of the year, Katrin Wehle, Deutsche Bank’s head of SSA debt capital markets, said a ramping up of activity in the sovereign space was unlikely. “We will probably see a steady pace of ESG issuance but there will be fewer inaugural events,” she said.

As Wehle noted, a lot of growth in the space over the past two years was driven by EU issuance and sovereign debuts, but the supply of EU social bonds has dried up and many sovereigns will not be able to issue every year. “We still expect some other sovereigns to join the ESG issuance spectrum but probably not to the same magnitude as we’ve seen in the last couple of years,” she added.

Deutsche Bank does, however, expect to see growth from emerging market sovereigns.

Overall, Gourc said the market consensus was upbeat. “In terms of client intensity in terms of inquiries and interest in ESG bonds, that’s very busy at the moment. I think everybody is quite positive on the pipeline ahead.”

The increasing numbers of green bond issuers reporting taxonomy alignment “should be quite positive for European issuance”, she said, as sustainable funds begin to look at taxonomy alignment reporting.

The next landmark in the sovereign space will likely come towards the end of the month, when India makes its long-awaited market debut.

The Reserve Bank of India has announced plans for 160 billion rupees ($2 billion; €1.8 billion) of issuance spread evenly across two dual tranche deals in late January and early February. The Indian green bonds will have a slightly blue tint, as the country’s green bond framework includes several blue categories of expenditure, and a separate category with possible allocation to terrestrial and aquatic biodiversity conservation.

Controversial deals continue

Despite the rush of deals, some bonds still attracted a level of scrutiny over their sustainability credentials.

The SLB market got off to a flying start with Air France-KLM raising €1 billion from its debut. The dual tranche bond is tied to the airline’s 2025 carbon intensity target and, in an unusual departure from the 25 basis points standard, investors in the 2026 tranche will be paid 75bps at maturity if the target is missed. Investors in the 2028 tranche will get 37.5bps a year.

As one of the first SLBs of the year, the deal has also attracted scrutiny for its sustainability characteristics. A research note published by Abn Amro said it hoped more airlines followed in Air France-KLM’s steps and that its SLB was “a positive step towards airline companies taking more responsibility”.

However, the note said it was important to have more transparency on how far Air France-KLM’s carbon intensity reduction would be driven by absolute emissions reductions, and argued that attaching an absolute target to the bond would be “perhaps more appropriate”. The note also called into question the ambition of the two step-ups, and said that investors should demand a higher financial penalty given the high expected coupon of the bonds.

The Anthropocene Fixed Income Institute also put out a research note on the deal, which praised the airline for setting its baseline year for emissions in 2019 rather than 2020, when the pandemic drastically reduced air travel. It estimated a roughly 50 percent chance that the airline would miss its targets, and said it was “a positive step to make a public climate commitment which will increase transparency in a challenging sector”.

Hong Kong’s airport also raised $1 billion from its second green bond, which was part of an eight times oversubscribed multi-tranche deal.

Reclaim Finance reiterated its criticism of the previous deal as “high-flying greenwashing”, given that the airport’s sustainable finance framework allows proceeds to be spent on new passenger terminals with green building certifications. Lara Cuvelier, a sustainable finance campaigner at the NGO, said that “financial institutions should not support any project that promotes the growth of air traffic”.