Labelled bonds: Europe leads, Asia catching

The green, social, and sustainable (GSS) bond market is rapidly expanding — in 2023, available issuances surpassed the historic $4 trillion mark, with new issuances representing over 20% of the European bond market — pushed by increased issuer transparency regarding use of proceeds and the impact generated by allocated capital compared to traditional counterparts.

As the GSS bond market continues to evolve, geographic data becomes increasingly vital. It provides insights into the geographical distribution of project impacts and the specific countries exposed to GSS bonds from a risk perspective.

According MainStreet Partners’ data, Europe leads the pack, with 66% of the total cumulative issuance of GSS bonds, followed by the Americas and Asia, accounting for 16% and 14%, respectively. China increasingly aligns with international principles. Singapore takes the lead in involving various sectors of the economy. The US leans towards environmental initiatives, while in Europe, social initiatives take precedence.

One interesting aspect is to look at the geographic analysis from two perspectives: issuers and financed projects.

Geography for issuers

Europe’s supremacy is not surprising given the region’s advancement in terms of environmental legislation, sustainable finance regulation, as well as the derived investor demand for, and scrutiny over, these financial instruments.

French issuers comfortably lead the way with almost €600 billion in total issuances, followed by German and Dutch issuers with €400 billion and €307 billion, respectively.”Asian issuers are definitely gaining a larger market share, with Singapore and Hong Kong as stand outs”While the US (ranking 4th) has some interesting developments, the most intriguing news comes from the Asian continent, with China, South Korea, and Japan respectively ranking fifth, sixth, and seventh in the top ten.

Asian issuers are definitely gaining a larger market share, with Singapore and Hong Kong as stand outs. In Singapore, the monetary authority presented the Taxonomy for Sustainable Finance Singapore-Asia at the COP28 conference last December, marking it as the world’s first multi-sector transition Taxonomy.

Hong Kong’s financial watchdog is instead finalising its Green Taxonomy following favourable feedback from the consultation, with the expectation that the final document will be published shortly — estimates suggest its release between 2025 and 2026.

Further to this, Mainland China and the EU have collaborated to establish the Common Ground Taxonomy (CGT) initiative within the International Platform on Sustainable Finance (IPSF). This international cooperation not only fosters synergies through knowledge-sharing and standardization, further facilitating a smooth transition, but also positively contributes to the 17th UN Sustainable Development Goal – Partnership for the Goals – which is often overlooked.

Geographical allocation

When examining the global projects financed by GSS bond issuance, the US emerges as the country with the highest capital allocated to ‘green’ projects. However, Europe, with France in particular, emerges as the clear winner in terms of ‘social’ projects. When assessing the reasons behind France’s high spending on social initiatives, we can hypothesize that this phenomenon is linked to the breadth and depth of France’s welfare system. Having a more robust welfare system can increase emissions and social spending through two mechanisms.

Firstly, part of the social spending by government entities, such as various social safety nets and access to publicly available universal healthcare services, is funded through sustainable financial instruments; secondly, it creates a greater expectation for private spending on social initiatives, which could result in a high level of private social bond issuance.

“Geographies that are at highest risk of the catastrophic effects of climate change, from severe weather events, are unlikely to receive almost any funding from Green Bonds to fund adaptation projects”In terms of environmental goals, although the US leads overall, France and Germany are more focused on development, construction, and renovation of green buildings. This comes as no surprise, given the ambition of the goals set by the European Commission’s ‘Fit for 55’ legislative package. By 2030, all new buildings must be ‘zero-emission,’ while by 2050, the same rule will apply to the entire existing stock. Also, not to be forgotten is that about 85% of the EU’s building stock was built before 2001, from which it follows that buildings currently account for 36% of the region’s total greenhouse gas emissions.

One of the most common queries is about why use of proceeds (i.e. the recipient/beneficiaries of green bond finance; where it gets ‘spent’/invested) does not go to the areas most in need, such as Oceanic islands. Geographies that are at highest risk of the catastrophic effects of climate change, from severe weather events, are unlikely to receive almost any funding from green bonds to fund adaptation projects. Instead, it is the rich developed nations (e.g. France) raising the Bond financing which then deploy that funding into other western/developed nations (e.g US). This is because the green bond market, by and large, favours climate change mitigation projects, such as renewable energy (generation facilities or storage) and green buildings (construction or renovation). These are generally large (and expensive) projects that, because of the areas of action of the largest economies, are more easily deployed in developed markets. These companies are also those making widest use of capital markets to obtain capital from investors, whilst frontier or emerging markets, those regions in greatest need of climate financing, tend to have higher credit risk and are more commonly obtaining capital in different ways, such as project financing with government backing. Another point can be made about climate change adaptation projects, which are underfunded by green bonds and of which frontier or emerging markets are in desperate need, due to their greater geographical/physical vulnerability.

In conclusion, to understand where issuers are located and in what countries the use of proceeds have been allocated, is becoming an important information that asset managers want to show across their impact reports to give full transparency and accurate information on the impact of their investments.

 

Published by Environmental Finance