Fixed Income: Getting Greener

EXECUTIVE SUMMARY

While ESG has solidified its place in the investment process for equities, the unprecedented situation brought on by the COVID-19 pandemic has led to a surge in sustainable debt issuance. In 2020, green bond issuance reached a record level of over US$300 billion. The trend is global with the US leading the way with the highest green bond issuance last year, followed by Germany, France, China and the Netherlands. Other sustainable debt instruments including green loans, social bonds, sustainability bonds but also sustainability-linked loans and bonds have aroused a similar fierce enthusiasm, as evidenced by a very high level of oversubscription. In total, Opimas expects the entire sustainable debt market to approach US$800 billion by the end of 2021, and to exceed US$1 trillion by the end of 2023.

Sustainable debt still lacks a regulatory framework, but voluntary standards have emerged to help define the criteria an issuance needs to meet in order to receive one of these precious labels. Organizations such as the International Capital Market Association (ICMA) or the Climate Bonds Initiative (CBI) have been particularly supportive.

ICMA and CBI have defined the principles and guidelines a sustainable bond should be aligned with. The procedure for assessing a bond’s alignment with these standards is increasingly entrusted to external reviewers, i.e., third party verifiers that attest to the sustainability of the bond or loan being issued. External reviews take different forms (Second Party Opinion, Third-Party Assurance, Green Bond Rating) and are provided by various types of players including ESG data providers and credit rating agencies. Although there are about twenty vendors who provide external reviews for sustainable bonds, only a handful dominate the market.

In 2020, about 90% of green bonds (by volume) underwent an external review, versus only 65% in 2015. This trend is expected to continue, notably due to upcoming EU regulatory requirements including the creation of an EU Green Bond Standard which could make external reviews mandatory.

As external reviews are becoming more commonplace, the market is steadily growing, and Opimas estimates that it could rise from about US$59 million in 2020 to US$112 million by 2023.

Because external reviews provide information on a bond’s framework, use of proceeds, impact, etc., they represent a consistent source of data. Some players have understood the potential value of aggregating key pieces of information at the bond and/or issuer-level into a centralized, searchable platform. This has led to the emergence of a new breed of data offering focused on sustainable debt, provided by new entrants operating next to traditional (ESG) data providers.

This new data offering will certainly be enriched by the appearance of new sustainable debt instruments, such as the sustainability-linked bond, which requires the issuer to define measurable key performance indicators and objectives.

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