Sunday, 29 August 2021

The growing ESG bond market and why sustainability-linked bonds are growing in popularity

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Climate change and social responsibility are in the spotlight at the moment, particularly over the last 18 months. With the globe’s noteworthy shift towards sustainability, it’s a subject high on everyone’s agenda, especially investors. As a result, many businesses are turning their focus towards funding initiatives like green bonds, ESG bonds and sustainability-linked bonds.

Sustainability-linked bonds are of course intertwined with the borrowers’ sustainability initiatives, and therefore these bonds are issued by companies that can communicate their strategic sustainability activities in detail and with a specific timeline. Borrowers must outline sustainability performance targets that are important and relevant and if these aren’t achieved, the company will not benefit from lower funding rates. Let’s delve a little deeper into the growing popularity of these bonds and what exactly is driving the surge in sustainability-linked debt financing.

How fast is sustainability debt growing?

According to the Environmental Finance Bond Database, thematic bond issuance – which includes green, social, sustainable and sustainability-linked bonds – totalled $600 billion in 2020 in the United States, which was almost double the $326 billion the country had in 2019. Over the first half of 2021, green and sustainability-linked bond issuances worldwide hit a total of $809.5 billion according to data from Refinitiv. This total is almost triple the $286.7 billion amount for the same time period last year, and it tops the entire amount that was recorded for 2020. Green bonds have almost tripled within the first 6 months of this year, and sustainable bonds have grown by 160%. Globally, we are seeing record numbers of ESG bond issuances, particularly amongst first-time borrowers.

While sustainability-linked bonds only make up a small percentage of ESG bonds, they first became popular in Europe and we are now seeing issuances in many other countries around the world. Governments, corporations and financial bodies are on the path towards a greener future and this has led to the growth of green bonds beating all expectations for 2021 so far. In Europe, the acceleration of green bonds has been the highest, with the Next Generation EU package driving much of the shift towards creating more sustainable operations because access to this package requires a plan for moving towards greener options. This package will see around $297 billion of green bonds get issued between now and 2027. China and the US are the most active markets, as China makes up 13.2% of the green bonds market, and the US makes up 12.8%.

What is driving this exponential growth?

Building back, better

The pandemic has created a spike in the demand for ESG bonds as it served to highlight the importance of climate change and social issues. Things like the Next Generation EU package and other stimulus packages that are making sustainability a key focus and a mandatory part of receiving funds have resulted in the “build back better” motto taking shape. In light of this, businesses and governments have pivoted towards finding more sustainable and greener ways to operate. Most companies need to have an ESG strategy in place now if they want a fighting chance at funding or moving forward in the new, greener world. ESG debt products revolve around green bonds (issued for environmental and climate change issues), social bonds (targeting social disparities) and sustainability-linked bonds (which allow companies to use funds for shifting to cleaner technologies, funding capital projects and more).

Investor shift

The case for responsible investment is strong now, and businesses with a focus on sustainability are more likely to succeed in the long term with the global shift towards this path. Apiramy Jeyarajah, head of UK wholesale at Aviva Investors, said: “Wholesale investors care about how their money is being invested and increasingly want to see their funds put to use in support of sustainable businesses that will benefit the environment and society, as well as deliver a good return.” Sustainability-linked bonds are the biggest up-and-coming ESG investment vehicle being used by many businesses. This shift in investor sentiment aligns with the global drive for a greener world and carbon neutrality in the not-too-distant future.

Government policy

Government policies are one of the biggest factors influencing the rise of ESG bonds, and some countries are leading the way in terms of promoting sustainability with their new rules. The European Union showed that it is a frontrunner when it came to ESG disclosure requirements and standards when the EU made this disclosure mandatory to all member nations by 2016. The EU also made a plan to triple the number of companies that need to submit a disclosure, and these include large privately owned businesses. In the US, a bill was passed by the House of Representatives, which made it mandatory for listed companies to submit a disclosure of their ESG data. If this is taken up at a Senate level, it will further encourage the growth of sustainability-linked bonds. Many countries are following suit in this vein, such as Hong Kong, which has now made it compulsory for firms listed on the stock exchange to submit a report detailing their direct and indirect greenhouse gas emissions volumes, including a description of these emissions and energy use efficiency targets, and a plan for the measures which will be put in place to achieve these targets.

Advantages for borrowers

Sustainability-linked bonds are a newcomer to the ESG space; however, they are an excellent tool that companies can use to push themselves towards achieving their goals. They also offer companies more flexibility regarding how funds are utilised and open up debt funding options that companies wouldn’t necessarily have access to from green bonds. This has made ESG bonds and sustainability bonds more attractive to businesses that are now flocking towards these financial solutions.

If you’d like your business to keep up with the changing times and begin your ESG, green or sustainable projects, you’ll need to look no further for fixed-income funding solutions. At Addendum, we offer an easy-to-use funding platform that connects corporate issuers and funders in the debt capital market. Visit our website to learn more about what we offer at Addendum and how you can benefit from our efficient platform that connects funders and corporates in a transparent environment.

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