A record 3,184 individual Green Social Sustainable (GSS) Bonds were issued last year, surpassing a historic €4trn in issuances of GSS Bonds in total, according to a report released today (12 February) by London-based ESG and Impact data provider MainStreet Partners.
The 'GSS Bonds Market Trend, Q4 2023' report revealed that while there were $930bn GSS Bond issuances in 2023, this was a 9% annual decline, influenced by the uncertainty of the high inflationary, high interest rate environment of the past 12-18 months.
As the macroeconomic environment has settled, GSS Bond issuances have rallied (sovereign sustainable bond issuance set a record start to the year in January 2024).
GSS Bonds Market Trend Q4 2023 also reports a 13% decline in the number of debut issuers (first-time GSS bond issuers), from 594 in 2022 to 517 in 2023.
This suggests that while there are fewer new entrants, those who have previously issued GSS Bonds are now issuing more of the instruments and at higher financial volumes, indicating an acceptance and usefulness of the GSS Bond instrument for a host of investors.
Pietro Sette, research director at MainStreet Partners, said: “Our latest report heavily suggests that the GSS Bond market is reaching a maturation phase, with a higher rate of issuance from entities that have previously used GSS bonds as part of their fixed income portfolio. This indicates GSS Bonds becoming a mainstream component of investor portfolios, both in retail and institutional.
“We believe GSS Bonds are at a pivotal point where there is a real paradigm shift for fixed income investors’ risk management. Thanks to reported post-issuance data, bonds aren’t associated with just the risk from the issuer’s country anymore, but we can now pair that information with the risk spurred by the location of the projects financed. This is an exciting development, allowing investors using our tools to go ‘beyond the label’ and better quantify the positive impact of their allocation.”
Other key findings:
Geographies:
• 20% of all European Bonds are now GSS Bonds, a significant increase since pre-2020. Notably, Europe is the region issuing the higher number of GSS Bonds (66%)
• France is the largest cumulative GSS Bond issuer, and allocates the most GSS Bonds to social projects
• The United States benefits from the highest allocation of GSS Bond financing green projects
• Green Bonds remain the preferred label by issuers with a 56% share, followed by Sustainability Bonds (19%) and Social Bonds (16%)
Funds:
• More than two-thirds of overall European fund flows in Q3 2023 came from sustainable funds
• A sample of SFDR Article 9 GSS Bond funds saw strong fund inflows in 2023, compared to outflows for SFDR Article 8 GSS Bond funds
EU Taxonomy Alignment:
• Impact Results and Taxonomy Alignment are the leading KPIs for GSS Bond fund managers to watch closely – inflation, and better performance of green projects, are some of the drivers of trends that warrant close monitoring.
• Alignment to the EU Taxonomy increased from ~30% to well above 40%, while average CO2 avoided has declined, from approx. 600 tCO2e/EUR 1 million to just below 500
• A decline in the average CO2 Avoided per EUR1 million invested via GSS Bonds is partly due to inflation raising project costs. The other ‘drag’ comes from more GSS Bond issuances by Sovereigns compared to Corporates, who achieve notoriously lower Impact Results
• Major drivers behind the rise in Taxonomy Alignment is “greener” Real Estate activities, which (in Q4 2023) contributes to funds’ Alignment almost as much as Renewable Energy
• Project-level analysis shows that proceeds from Green Bonds have consistently higher alignment to the European Taxonomy (~60%), compared to Revenues or Capex at company level (<10%)