investment viewpoints
Labelled bonds: a silver lining from green debt
How has the labelled fixed-income market held up in view of macro events this year? We take a close look to pinpoint areas of strength. In particular, we highlight encouraging signs in the world of green debt, such as the number of repeat issuers among sovereigns.
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Defying sentiment
Overall, the labelled fixed-income market has fared well in 2023, despite concerns sparked in the first half by turmoil in the US banking system and the forced takeover of Credit Suisse (see Figure 1).
Total global issuance across all labelled bond instruments (including green, social, sustainability and sustainability-linked bonds, plus sustainability-linked loans) reached USD 717 bn in H1 2023, according to figures from BloombergNEF. This was slightly below the USD 839 bn issued in the first half of 2022, but still a healthy amount given the macro environment (see Figures 1 and 2).
A closer look shows that the decline in labelled fixed-income issuance does not reflect weakness across the board. Rather, it was driven mainly by one category: sustainability-linked loans. This is not entirely surprising, given that banks tightened lending standards in the wake of the sector turbulence in March.
FIG 1. Annual labelled fixed-income market issuance over time (USD billions)
Source: BloombergNEF at June 2023. For illustrative purposes only.
FIG 2. H1 labelled fixed-income market issuance over time (USD billions)
Source: BloombergNEF at June 2023. For illustrative purposes only.
FIG 3. H1 labelled fixed-income market issuance over time, by asset type (USD billions)
Source: BloombergNEF at June 2023. For illustrative purposes only.
Green bonds: strength to strength
By contrast, issuance of green bonds reached a record in H1 with an impressive 19% jump from a year earlier. The main driver was sovereign green debt. In fact, the USD 77.35 bn in issuance volumes for these bonds almost matched the full-year total of USD 82 bn in 2022 (see Figure 4).
It is always a good sign to see repeat issuers, and they came back in force in the first half. Germany led by volume, raising close to USD 15 bn via green sovereign bonds. Italy followed close behind, tapping the market for the equivalent of USD 13.5 bn. France indicated earlier in the year that it aimed to raise EUR 11 bn in sovereign green bonds. As of June 30, it had already issued more than the equivalent of USD 6 bn.
FIG 4. Comparison of H1 2023 sovereign green bond issuance (in USD billions) with yearly totals
Source: BloombergNEF at June 2023. For illustrative purposes only.
FIG 5. Sovereign green bond issuance in H1 2023 by issuer
Source: Bloomberg/NEF at June 2023. For illustrative purposes only.
While not one of the biggest hitters, Switzerland also bucked global trends with record volumes of labelled fixed income issued in the first half – similarly driven by green bonds. Green bond issuance in Swiss francs in H1 almost matched the total for the previous year – surging 98% from the same period in 2022 as both newcomers and repeat issuers tapped the market.
The drop in global issuance volumes for labelled fixed income in USD for H1 is concerning when compared with the same period in previous years. However, it is reassuring to see volumes of green bonds, sustainability bonds and social bonds all in line with 2022 levels.
Another encouraging sign for the overall market was the debut green-bond issuance from several sovereigns, including Israel, Turkey and India.
FIG 6. Comparison of 1H 2023 Swiss franc labelled-bond market with past annual issuance (CHF billions)
Source: BloombergNEF at June 2023. For illustrative purposes only.
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Case study1: the importance of India’s success
Locking in a 'greenium'
Rapid industrial development and a booming population made India the world’s third-largest emitter of greenhouse gases in 2021, despite GHG emissions per capita being well below the global average. The country’s vulnerability to climate change means it is already experiencing the consequences of global warming. Fortunately, India is moving to redress the balance.
India has set climate-related goals, despite not aligning with the Paris Agreement (the country is targeting net zero in 2070 rather than 2050). These include a 45% reduction in emissions intensity by 2030 and an increased share of non-fossil fuel energy. Having originally launched its National Action Plan on Climate Change in 2008, the country has made significant progress in installing renewable-energy capacity, ranking fourth globally in 2022 after China, the US and Germany.
Going forward, India needs to balance its climate goals with delivering the energy needs for continued economic growth, along with the electricity consumption of more than 1.4 bn people. The government’s recent National Electricity Plan (NEP) outlined how to achieve this in some detail.
India's position as one of the largest renewable-energy markets presents attractive opportunities for investors seeking to support green projects. To finance the investments required to meet clean-energy targets and transition away from fossil fuels, India issued its inaugural sovereign green bond on 25 January 2023. This was well-received, with a total value of INR 80 bn (USD 1 bn) issued in 5- and 10-year green bonds.The issuance established a ‘greenium’ for the Indian government, with a lower cost of borrowing than conventional bonds. In a sign of investor confidence in India's commitment to green projects, the coupon of 7.29% for the 10-year bond was 0.06 percentage point lower than comparable sovereign debt.
Use of proceeds from India's green-bond framework will focus on areas that address environmental challenges while promoting sustainable development and climate-risk mitigation. These include decarbonised transport, climate-change adaptation, water and waste management, pollution prevention and control, and biodiversity conservation.
These developments are highly positive. Even so, it is important to note that India's continued reliance on coal power is a hindrance to its net-zero ambitions. The NEP calls for increased domestic coal production and adding more coal-power capacities between 2027 and 2032. India also aims to increase imports of liquefied natural gas.
Despite these reservations, India's debut in the sovereign green-bond market was a significant milestone in meeting its climate goals and attracting investment for sustainable development. The greenium achieved demonstrates investors' interest in financing India's net-zero transition, and increased participation in green-bond issuance will hopefully accelerate the country’s progress.Given the country’s economic ambitions and ongoing population growth, India’s success in decarbonising is crucial for achieving global climate goals.
Sources
[1] Important information on case studies: the case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund's past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
Outlook for the labelled-bond market
Overall, we continue to expect strong growth in the labelled-bond market. Sovereign green bonds, in particular, have significant potential and additional supply is welcome. Encouragingly, Japan is reported to be considering an inaugural offering in H2, with the launch of a ‘transition’ bond to help finance efforts supporting 2030 and 2050 carbon-reduction goals. Switzerland’s recent vote to accelerate net-zero targets should support continued growth in the Swiss franc-denominated market for labelled bonds.
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