S&P tips ESG bond issuance to return to $1tr in 2023

Insight Investment warns of ‘two tier’ system in market as gulf in framework quality continues to grow, but certification levels improve.

S&P Global is tipping annual issuance of green, social, sustainability and sustainability-linked bonds to return to $1 trillion in 2023.

In its forecast for key sustainability trends, S&P warned that overall market and macroeconomic conditions could “constrain issuer appetite” for ESG-labelled bonds. Nevertheless, the firm expects issuance to grow from $850 billion in 2022 to between $900 billion and $1 trillion this year.

Part of this growth will come from the asset class “capitalising on various initiatives to fill the climate financing gap”, including the push for adaptation finance and scaling up of blended finance by multilateral development banks.

The market will continue to face questions about the effectiveness of sustainable debt in helping issuers reach sustainability goals, the forecast noted, with SLB issuance falling sharply in the latter half of 2022 as issuers increased their scrutiny of the structure.

Ongoing concerns about market credibility were also raised by Insight Investment, which warned last week that ESG-labelled bond frameworks may be moving to a “two-tier market” after the number earning the firm’s best-in-class rating fell in 2022 for the third consecutive year.

The red and the green

The firm rates frameworks as red, light green or dark green based on their alignment with its sustainability and disclosure requirements. “Red” bonds are ineligible for investment.

In 2020, more than a third of bonds were classed as dark green, but this fell to just over 20 percent in 2022. Meanwhile, the number of red classifications rose from less than 10 percent in 2020 to over a fifth in 2022.

While appetite for green bonds has remained strong, Insight said the market could be splitting, with rising demand for frameworks which meet the highest standards of disclosure and reporting among some investors, and others looking for more limited frameworks.

The firm raised concerns over framework quality, but added that it expects the use of external verification to continue to grow in 2023. While obtaining a second-party opinion or other kind of verification is “commonplace” in Europe, it remains less widely employed in other regions, including the US and China.

Data from the Intercontinental Exchange released on Wednesday as part of its annual report on impact bond trends shows that the proportion of US ESG debt which acquired external verification soared from 59-83 percent from 2021-2022. China also saw a jump from 71-82 percent, while the global proportion rose 4 percentage points to 88 percent.

One major name in the US which only recently produced a green bond framework and second party opinion was Berkshire Hathaway Energy. The firm, which is the sixth-largest corporate issuer by volume of index-eligible bonds outstanding, produced a framework and SPO in November.