Green, social and sustainable (GSS) bond issuance was resilient in 2023, rising by 2% year-on-year despite sluggish economic growth. While the GSS bond market is unlikely to rebound to 2021’s record USD 1.1 trillion in issuance, we expect it to hold up well even with challenges such as higher-for-longer interest rates and moderating growth.
Moody’s projects green, social and sustainable bond issuance could reach USD 950 billion in 2024, slightly higher than 2023’s USD 946 billion, while S&P forecasts issuance could rise to above the USD 1 trillion mark.
Although supranational entities, financial institutions, and agencies initially led the way in GSS bond issuance, sovereigns now account for a growing proportion of new bonds. Bonds issued directly by government departments have risen from about 7% of the total market value at end- 2017 to over 20% at the end of March 2023, according to MSCI data.
In 2023, a record 35 sovereigns globally issued sustainable bonds totalling USD 169 billion, exceeding the previous high-water mark of 26 issuers in 2022 with USD 141 billion in issuance. Of these, 17 were developed countries and 18 emerging market sovereign (EM) issuers, including seven who came to the market for the first time.
Over recent years, EM sovereigns have contributed more to global GSS sovereign bond issuance, accounting for 25% in 2023, underscoring the significant climate finance gap for developing economies to build resilience to climate change and fund the shift to a low-carbon economy.
These national, regional and local governments face not only high exposure to physical climate risk and carbon transition risk, but often also lack the fiscal and institutional capacity to tackle these problems on top of facing higher costs of capital. Such challenges require continued innovation in their financing approaches.
We believe sustainable finance will be a growing source of funding as emerging market sovereigns present national energy transition plans and climate adaptation goals.
The Sharm El-Sheikh Implementation Plan drawn up at COP27 in 2022, included an estimate that investments needed to transition to a low-carbon economy globally would total at least USD 4-6 trillion per year. Sovereign GSS bond issuance could provide a significant proportion of this financing. At the following COP28 meeting, climate finance was again a hot topic and we expect it to continue as be a key focus for developing and emerging markets.
Improving standards
Standards in the GSS bond market are improving. From late 2024, the European Union Green Bonds Standard (EUGBS) is set to transform issuance across the bloc in terms of reporting and transparency. The standard requires a close alignment with the EU taxonomy for sustainable activities and its six environmental objectives for sustainable activities:
- Climate change mitigation
- Climate change adaptation
- Sustainable water and marine use
- Circular economy
- Pollution control
- Biodiversity.
Issuers of bonds under the EUGBS will be required to disclose detailed information about how the proceeds will be used to ensure alignment with the taxonomy. They must explain how the funds contribute to the sustainable transition, ensuring green investments are not negated by unsustainable activities in other areas.
The EUGBS builds on existing green bond frameworks, including the Green, Social and Sustainability Bond Principles formulated by the International Capital Markets Association (ICMA), alongside frameworks in China and India covering local markets.
The shift from voluntary to regulatory standards should enforce greater market discipline and encourage increased issuance of green, social and sustainable bonds.
A diversifying climate finance tool
Building on these improving standards, we have seen a issues covering a steadily widening range of themes in the last six months. Clean transportation – particularly railway-related financing – continues to dominate issuance from a thematic standpoint, but the market is seeing increased diversification.
Iceland, already the world’s most gender-equal country, has become the first sovereign to issue a gender-based bond aimed at closing the gender gap further. Previously, only companies and development banks had issued gender-labelled bonds. Iceland’s entry into this segment is notable as it issued its first GSS bond (a EUR 750 million green bond) only in March 2024.
Entering the GSS bond market in 2022, Canada was the first sovereign issuer to include nuclear energy expenditures in its March 2024 GSS bond of CAD 4 billion after the government updated its Green Bond Framework to include nuclear in its eligible investment areas.
The EU Taxonomy includes provisions for nuclear, so this could become a recurring GSS bond theme in the months ahead.
Other debutants to the green bond market include Turkey, which has raised USD 2.5 billion, with the transaction more than three times oversubscribed. It was one of the first EM sovereigns to allocate ( 47%) to environmentally sustainable management of natural resources and land use.
Brazil debuted in the market with a USD 2 billion sustainable bond in November 2023. Its proceeds will be allocated to deforestation control, biodiversity conservation, and poverty reduction programmes.
A vehicle to realise net-zero goals
Sovereign green, social and sustainable bonds can be seen as a robust climate-financing instrument that facilitates collaboration between investors and sovereign governments on environmental aims.
Investors can showcase the green credentials of their portfolios, while sovereigns can progress towards their net-zero commitments and goals, particularly as two key net-zero milestones in 2030 and 2050 approach.
Adherence to industry-established guidelines such as those by the Partnership for Carbon Accounting Financials (PCAF) and International Capital Markets Association can enhance bond efficacy. These frameworks underpin the methodologies for carbon footprint calculations and guide the selection of impact reporting indicators at the project level, ensuring transparency and accountability in the financing of climate action.
Sovereign engagement
Direct investor engagement with sovereigns can be a powerful tool to catalyse climate action.
The Collaborative Sovereign Engagement on Climate Change is an initiative led by the Principles for Responsible Investment (PRI) to assist governments in addressing climate change. Its goal is to have investors join forces in encouraging governments to undertake comprehensive measures to combat climate change, adhere to the objectives of the Paris Agreement, and strive to limit the rise in the average global temperature to 1.5°C.
Members of the initiative, including BNPP AM as a founding member, have identified Australia as a sovereign debt issuer that would be a suitable candidate for the initiative’s pilot project. The country passed a Climate Change Act in 2022, but has done poorly compared to peers on climate and environmental measures in sovereign risk ratings.
If successful, a similar sovereign engagement programme will target other issuers.
We have adapted our ESG scoring framework to provide a view of the ESG performance of a country. This enables us to compare countries with different levels of economic development across environmental, social and governance dimensions.
Notably, we assess a country’s ambition for tackling climate change based on information on the policies adopted to address it and their future exposure to physical climate risk.
We also apply the BNP Paribas Group’s sensitive countries framework. This includes measures to mitigate risk and activities that are considered particularly exposed to money laundering or terrorism financing. As with our company scoring model, we incorporate the investment teams’ in-depth knowledge and account for dialogue and engagement with debt management officials and policymakers.
