Global issuance of sustainable bonds and loans hit record highs of over $1.4trn in 2021 and could reach over $7trn annually by 2025 “under favourable market conditions”, according to financial sector trade body the Institute of International Finance (IIF).
The IIF – which produces widely-referenced economic and capital flows research – said that under its bull scenario, sustainable debt issuance could reach an annual pace of $7.2trn by 2025, driven by net zero commitments and the growth of sustainability-linked loans which is expected to eventually dominate the sustainable debt market.
The body’s alternative baseline scenario projected issuance of nearly $3.8trn in the same period.
In 2021, ESG-labelled bond issuance – encompassing green, social, sustainable, and sustainability-linked bonds – accounted for some 70% of the sustainable debt market compared to loans. Green bonds topped overall issuance at 36%, followed by sustainable loans and social bonds which made up 19% and 15% respectively.
The IIF anticipates global sustainable debt issuance in 2022 to hit $1.8trn, on the back of surging investor demand for ESG debt funds which will further help reduce borrowing costs.
It also noted that ESG debt issuance had grown exponentially in emerging markets, from $75bn in 2020 to $230bn in the subsequent year. Nearly half of the activity was China-based, followed by Latin America and South East Asia at 20% and 25%.
European sovereign bond issuers are expected to play key roles in increasing sustainable flows to the region in 2022, said the IIF, with issuances of EM ESG Eurobonds to approach $40bn – making up 25% of all projected Eurobonds this year.
State-owned enterprises (SOEs) in emerging markets issued over $50bn ESG-labelled bonds in 2021, predominantly driven by China, and are expected to increasingly prioritise climate and environmental issues when seeking to raise future capital, the report added. EM SOEs "dominate sectors which are critical for the transition to a low-carbon economy while constituting over half of all EM corporate debt securities”.
Meanwhile, IFI fund data showed that emerging markets strategies received less than 5% ($4.8bn) of global inflows into ESG-labelled funds in Q3 2021.
Emerging market economies have faced longstanding hurdles to secure the capital needed to build out low-carbon economies, with developed nations failing repeatedly to provide some $100bn in annual climate funding commitments.
While hundreds of institutional investors have pledged to support the climate transition, asset owner bodies say they faced hurdles when it comes to emerging markets because of regulatory and fiduciary requirements to invest in investment grade debt and equity, restricted market access and lack of data.
Separately, a Bloomberg Intelligence report published yesterday valued global cumulative ESG debt issuance at $4trn in 2021, and issued an annual projection of $15trn by 2025 on the back of upcoming EU and US infrastructure spending plans, in addition to accelerating emerging market capital flows.