Mark Oliphant, Head of Marketing & Communications at The International Stock Exchange (TISE), reviews recent developments within sustainable finance and assesses the future for the market in both global and local contexts.
In the decade leading up to 2022, sustainable finance enjoyed seemingly unstoppable growth as regulators, companies and investors sought to address the climate crisis and investors poured capital into this asset class.
And then Russia invaded Ukraine.
We must not forget the human suffering, but the conflict also precipitated an energy crisis which raised serious questions about the commitment to reducing the reliance on fossil fuels. In turn, the energy crisis stoked inflation and prompted central banks to hike interest rates to levels not seen since the global financial crisis.
This generated significant uncertainty over the future direction of rates and therefore the pricing of credit and assets, squeezing the supply of sustainable investment opportunities in a market which has historically seen heavy investor demand.
Sustainable bond trends
Data from the Climate Bond Initiative (CBI) shows that the issuance of green, social, sustainable, sustainability-linked and transition bonds fell for the first time in more than a decade during 2022 to around $860 billion, although collectively they maintained a 5% share of the total bond market and total lifetime volumes of these forms of sustainable debt reached more than $3.7 trillion.
A new report from S&P Global Ratings projects that sales will rise again to between $900 billion and $1 trillion in 2023. A key driver is expected to be traditional ‘use of proceeds’ bonds, such as green bonds, which require issuers to use the proceeds raised from an issuance to finance specific projects. However, sustainability-linked bonds, where issuers need to meet specific sustainability targets or face increased coupon rates on payments to bond holders, are the most dynamic product in the market and they are expected to be in-demand once more in 2023.
CBI data shows that the nascent transition bonds sector saw volumes of just $3.5 billion in 2022 but a recent report from the Bank of America suggests that market demand for transition bonds is gaining momentum.
Since it was launched in 2021, green bonds, sustainable bonds, sustainability-linked bonds and humanitarian catastrophe bonds have been admitted our sustainable finance segment, TISE Sustainable. In 2022, there were new admissions from brands such as Dutch telecommunications group VodafoneZiggo, the UK’s leading independent vehicle outsourcing business Zenith, and renewable energy infrastructure investor Bluefield.
This year began with the listing of a sustainability-linked bond issued by Costa Rican telecommunication brand, Liberty Costa Rica. It is the largest sustainability-linked bond issued for the digital infrastructure sector in Costa Rica and the financing ultimately supports an expansion of the fixed network and 4G/5G coverage to narrow the digital divide.
“TISE Sustainable complements the other elements of the sustainable finance ecosystem within the Channel Islands and we are delighted to continue to participate in sustainable finance working groups across the islands.”
We anticipate that sustainability-linked bonds will continue to be a growth area, and we are also closely monitoring the volumes in transition bonds. Last October we launched our new transition offering to cater for transition bonds and transition issuers, providing further support to initiatives which lead to a lower carbon economy and society.
TISE Sustainable complements the other elements of the sustainable finance ecosystem within the Channel Islands and we are delighted to continue to participate in sustainable finance working groups across the islands. From our offices in Guernsey and Jersey, and as a Partner Exchange of the United Nations’ Sustainable Stock Exchanges Initiative (UN SSE), we play an important role as a facilitator of global sustainable capital flows. At 31 December 2022, there was £13 billion of listings on TISE supporting environmental, social and sustainable initiatives.
Whilst the macro-economic environment remains far from buoyant, we anticipate that the improving conditions will filter through to the sustainable bond market as the year progresses. The indications are that the slowdown last year was just a brief interlude and that the return of a more stable economic environment will provide the impetus to increased capital allocation towards sustainable investment opportunities in 2023.
This article was originally published in Business Brief, Sustainability Edition, April 2023