Green and sustainability bonds are not seeing the overall growth they had in 2021, but they continue to gain traction in emerging markets as financing options for sustainable transitions become more of a priority, according to a report from Moody’s.
Issuance of green, social, sustainability, and sustainability-linked (GSSS) bonds in emerging markets totaled $34 billion in the first quarter of 2022, up 22% from the fourth quarter last year and 13% from the first quarter of 2021, according to the report. That despite worldwide issuance of GSSS bonds being down 28% from the first quarter of last year.
Emerging markets GSSS bonds also increased their global share to 17% from 15% over all of 2021. Green bonds are the most used in emerging markets, with $18 billion issued so far this year, and sustainability bonds followed at $10 billion. Green bonds, though, accounted for 52% of the total GSSS issued in emerging markets over the first quarter, which is the lowest on record, showing that there is diversification in the tools in emerging markets, Moody’s says. Sustainability-linked bonds saw their second-highest increase at $6 billion in the quarter.
That diversification in the types of bonds being issued shows those in emerging markets are seeking to finance a wider range of environmental projects, Moody’s says. The increased use of sustainability-linked bonds will likely continue because some emerging market issuers have had a more difficult time finding enough eligible projects to support the use of proceeds from sustainable bonds, the report finds.
Developing economies are more exposed to the physical impacts of climate change and sustainable development needs can be significant in these areas. The International Energy Agency estimates that 70% of the investment needed to reach net-zero objectives should go toward emerging markets.
Emerging markets are also seen as a key piece of energy transitions, as well as a potential for ESG investment opportunities, but funding is lagging in those economies despite record investments overall. Moody’s found in a report earlier this year that increased focus on emerging markets could also lead to carbon transition risks, and private-public and industrial collaboration is needed to help with transitions.
Moody’s says sustainable debt can help close those funding gaps, and those financing needs will keep GSSS bond issuance growing in the coming year. The bonds will help with sustainable transitions, such as renewable energy, wastewater management, and clean transportation.
Still, this new range of sustainable bonds shows potential for further increase in the market. Moody’s says it is also seeing diversification regionally as new sustainable bond markets are popping up and complementing continued growth in more established markets, such as China.
GSSS bonds in China remained the largest in emerging markets at 41% so far in 2022, but that is down from 50% over all of 2021. Asia-Pacific continued to be the top region for the bonds, but the Middle East and Africa recorded its largest quarterly share on record, and Latin America saw its third-highest quarterly issuance rate.
Moody’s says nations such as the Philippines, Benin, Mexico, Colombia, and Chile will help continue the growth of GSSS bonds in emerging markets as they attempt to finance their sustainable development. This also could help encourage further private and public issuance of the bonds in emerging markets.
Worldwide, sustainable debt surpassed a record $1.6 trillion in 2021, according to BloombergNEF. Moody’s says overall the market will be flat in 2022.
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