Market volatility weighs on sustainable bond activity

Faced with elevated inflation and market volatility, the issuance of sustainable bonds is expected to remain flat this year, Moody’s Investors Service says.

In a new report, the rating agency said that global issuance of sustainable bonds declined in the first quarter of 2022, as market headwinds – including the Russian invasion of Ukraine, rising inflation, and tightening monetary policy – intensified.

Moody’s reported that issuance of green, social, sustainability and sustainability-linked bonds totalled US$203 billion in the first quarter, down by 11% from the fourth quarter of 2021, and down 28% from the first quarter last year.

“While our baseline expectation is that sustainable bond issuance growth will resume when market volatility abates, broader market conditions will provide greater than anticipated headwinds for sustainable bond issuance this year,” the report said.

For the full year, sustainable bond issuance is now projected to total about US$1 trillion, which would be more or less flat from last year.

Specifically, Moody’s now forecasts US$550 billion of green bond issuance, plus US$125 billion worth of social bonds, US$175 billion of sustainability bonds, and $150 billion in sustainability-linked bonds.

Yet, looking further out, the rating agency expects growth to eventually resume.

“Long-term sustainable bond growth potential remains strong despite temporary market headwinds,” Moody’s said.

Indeed, the rating agency pointed to a variety of long-term drivers for sustainable issuance in the years ahead, including, “The need for climate mitigation and adaptation financing, accelerated decarbonization efforts to achieve net zero goals, growing regulatory attention on sustainability and a continued focus on the interconnectedness of environmental and social objectives will all support the sustainable debt markets over the long term.”

Alongside climate-related issues, Moody’s noted that sustainable debt markets are increasingly financing projects to promote gender equity as well.

“Global gender inequality comes at the expense of global GDP with estimated losses of US$160 trillion in human capital wealth due to disparities in earnings between men and women,” it said. “There is increasing demand from investors seeking to remedy these challenges to finance projects that provide services to help bridge the gender divide.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.