Sustainable Bond Sector Poised to Break the $1 Trillion Barrier in This Year's Market Surge

This year, the market for sustainable bonds could surge past the $1 trillion mark, undeterred by the persistent challenges of macroeconomic turbulence and geopolitical uncertainties.

A recent analysis by the esteemed rating agency S&P sheds light on this optimistic forecast. It suggests that the combined sectors of green, social, sustainability, and sustainability-linked bonds (GSSSB) could see their values fluctuate between $0.95 trillion and $1.05 trillion in 2024. This projection indicates a slight uptick from the $0.98 trillion recorded in 2023, though it also hints at the potential for a minor downturn.

"A number of factors could underpin growth in GSSSB issuance," the report said. "These include increased adoption of sustainable taxonomies and transparency initiatives, growth in issuance from emerging markets, and efforts to accelerate the energy transition. At the same time, certain macroeconomic factors could restrict issuance, including uncertainty associated with high-interest rates and the possibility of wider economic slowdown in key regions such as Europe and Asia-Pacific."

Growth is likely to be driven by green bond issuance, with S&P tipping the sector to build on the 10 per cent growth seen in 2023, which saw the market reach $575bn.

"Nonfinancial corporates still make up the largest portion of the green bond market, but the financial services sector now has nearly equal volumes after three consecutive years of growth," the report said. Sovereigns had their strongest year on record in 2023, as their GSSSB issuance reached $160bn, breaking the previous record of $ 117 bn in 2021. Countries such as France, Germany, Italy, and the UK each issued more than $10bn of sovereign green bonds in 2023."

The composition of the green bond market continues to evolve, with non-financial corporations holding the majority stake. Yet, the financial services domain is quickly catching up, marking its third year of consistent expansion. Sovereign issuances also saw unprecedented heights in 2023, amassing $160 billion and overtaking the peak of $117 billion in 2021. Notably, nations such as France, Germany, Italy, and the UK each floated over $10 billion in sovereign green bonds last year.

Meanwhile, transition bonds are gaining momentum. They are poised to mark their most significant year by providing essential funds to high-carbon firms committed to greening their operations.

However, the social and sustainability bond sectors might not witness a similar uptrend in 2024, echoing the stagnant performance observed in 2023.

Furthermore, the report raises critical inquiries about the impact of sustainability-linked bonds, which incentivise firms with favourable interest rates upon achieving specified environmental milestones. This segment saw a downturn for the second year in 2023, plummeting by 44% to $66 billion, underscoring ongoing debates about their effectiveness in fostering genuine sustainability advancements.

"To date, we are aware of few cases of issuers missing the sustainability performance targets (SPTs) linked to their SLBs," S&P said. "When this does occur, market participants have expressed doubts around the ambitions of the SPTs and whether the standard 25-basis-point coupon adjustments sufficiently incentivise issuers to reach targets. A high probability of an issuer meeting targets and low consequences for missing them may mean some investors see SLBs as no different from standard, unlabeled bonds."

Overall, S&P predicted a relatively stable year for the GSSSB market, likely to be shaped by trends in the broader bond market.

"We anticipate that 2024's growth will be only moderate compared with 2023 and that we will not yet see GSSSB issuance reach the peaks of 2021," it said. "Since we expect penetration of GSSSBs in overall bond issuance to consolidate further and potentially inch higher, we think overall financing conditions will be the main driver of variability around our $1tr issuance forecast for 2024… As GSSSB markets continue to mature, 2024 may be a year of broadening regional reach and instrument types as opposed to strong overall growth."