European ESG-linked bond issuance stabilising after strong growth
The forbidding macroenvironment coupled with the turmoil generated by the war in Ukraine is taking its toll on the growth in issuance of ESG-linked securities
The forbidding macroenvironment coupled with the turmoil generated by the war in Ukraine is taking its toll on the growth in issuance of ESG-linked securities
European ESG-linked securities accounted for 30% of all European non-financial corporate bond issuance in the first half of this year, up from just 19% in the same period a year ago, while in North America and Asia they experienced a moderate decline, according to a study by ratings agency Scope.
While the experience in Europe shows healthy demand for ESG-linked securities, Scope says that on a quarterly basis, after experiencing rapid growth in the third quarter of 2021, their share of bond issuance universe has “stabilised” over the last four quarters.
“This stability makes a stark contrast with the steep overall increase in ESG-linked corporate bond volumes in 2021,” says Eugenio Piliego, director of corporate ratings at Scope.
“The healthy appetite for ESG-linked bond issuance coincides with the slowdown in overall corporate bond issuance amid growing market and macroeconomic uncertainty in the past two quarters, made worse by Russia’s escalation of the war in Ukraine in February,” he adds.
Scope expects that in Europe the overall market made up by ESG-linked bonds will continue to hold steady for the rest of the year at around 29%. Issuance in North America is set to settle at around 5% to6%, with a similar figure for Asia, representing a slight decline for the two regions.
Europe’s leading first half issuers of ESG bonds were Italian utility Enel SpA (€7bn), Dutch utility TenneT Holding (€3.9bn), German real estate firm Vonovia AG (€2.6m), French water utility Suez SE (€2.6bn), and German utility E.ON SE (€2.3bn).
More broadly, the Scope study highlights that ESG-linked issuance in Europe in the first half of the year was led by the capital-intensive sectors typically associated with active financing on debt capital markets, namely utilities, real estate, and telecoms, with utilities particularly active.
Scope says the three sectors increased their combined share of the ESG-linked market to 69% from 56% in the same period last year, with activity from other issuers, such as capital goods and consumer goods, stabilising or declining. The rest of Europe’s ESG-linked issuance was relatively evenly split among other sectors whose share of total issuance fell in the period.
The research also found that ESG bond issuance during the first half of the year was diverse across geographies, led by issuers from Italy, France, and Denmark. Italian companies again issued the highest relative amount of ESG bonds at over 80% – with utility Enel the largest contributor, generally issuing a large portion of debt through its Dutch subsidiary.
Drilling down further, Scope says that based on a sample of 151 sustainability-linked bonds (SLBs) issued over the last 18 months, 84% of them shared greenhouse gas emissions (GHG) as a component of their KPIs.
“This comes to little surprise, since such as indicator is relevant for most industries, but it also has a direct link with the stated EU commission’s goal of climate neutrality by 2050, while this link cannot generally be made for other KPIs,” says the report
Commenting on Scope’s findings, Krista Tukiainen, head of market intelligence at Climate Bonds Initiative, a not-for-profit organisation responsible for certifying green bonds, says: “The recent expansion of European sustainability-linked bond volume shown by the report is in line with the accelerating growth of this segment of the sustainable bond market globally, even in the prevailing inflationary conditions.
“This indicates an appetite from both investors and issuers to come to market to signal their sustainability commitments and help fund the transition to a low-carbon economy, including from early movers such as Enel. Many of the European issuers are also household names in the green bond market, showing broad efforts towards decarbonisation.”
Tukiainen says that to ensure the sustainability-linked bond segment delivers in this regard, “it will be important to continue to push the ambition of the targets that bond funding is tied to, particularly from a climate perspective”.
Unlike traditional green and social bonds, a sustainability-linked bond comes with no restrictions on how the proceeds can be used, explains Tukiainen This flexibility allows a broader universe of issuers to obtain sustainable financing, such as those that may not have enough green or social capital expenditure to issue a sustainable use-of-proceeds bond or lack resources to accurately track or report practices required for such instruments. Issuers of sustainability-linked bonds typically pledge to improve their performance against tailor-made ESG targets and link this commitment directly to the coupon paid to investors.
Climate Bonds Initiative will be releasing its own latest analysis of sustainability-linked bonds market next week.
