Amid an evolving impact bond market in 2024, global issuance is seeing a potential uptick amidst a more favourable rate environment and heightened scrutiny on bonds and issuers.
- Global issuance of impact bonds should benefit from a more favourable rate environment in 2024, whilst market and regulatory trends will also support issuance but deepen scrutiny of bonds and their issuers.
- In 2024, we are forecasting issuance to increase slightly from 2023 levels to between USD820-900bn – returning to 2022 levels – as issuers benefit from more favourable financing costs than the past two years.
- Green bonds are also expected to maintain their dominance and constitute 60-75% of issuance of the market due to high investor demand and large capex requirements from corporates and sovereigns to implement decarbonisation plans.
- The sustainability-linked loan market will see slower growth as a result of rising regulation but will still play an important role in transition finance.
- In 2023, we investigated and proposed a way forward for investors in estimating the carbon footprint of specific green bonds which should help to drive investor demand for green bonds[1]. We look forward to partnering with industry participants on this in 2024.
- In 2023, key innovation within the impact bond market included integration of biodiversity within green bond frameworks, the introduction of the Practitioner’s Guide for Bonds to Finance the Sustainable Blue Economy[2] and a new generation of debt-for-nature (DFN) swaps came to the market ahead of COP28. Whilst nature-related projects represent a small share of use of proceeds, we expect this to grow in 2024 as a result of rising investor demand.
- We also expect innovation to focus on transitional activities.
- There is a space for standards to be set on whether transition is a subset of the green bond market or as a separate category.
- For financial institutions and banks, we expect increasing use of sustainability-linked loans (SLLs) to finance transition activities, following prominent examples by Nordea and Bank of China.
- Another important driver of issuance trends will be the EU Green Bond Standard (EU GBS), which can be applied by issuers from Q4 2024. We expect issuers to focus on assessing if their green activities are aligned to the EU taxonomy and therefore eligible to be labelled under the EU GBS, this will be helped by CSRD EU taxonomy reporting requirements. Nonetheless, the high bar required for alignment with the GBS will likely see issuance concentrated in a handful of sectors.
David McNeil, Head of Responsible Investment Research at Insight Investment, said these trends could lead to pricing differentials over time:
“The growth of transition finance, nature finance, and issuance by hard-to-abate emissions intensive sectors, will lead to greater scrutiny of the alignment of labelled debt with the overall strategy of the issuer. Whilst the impact of environmental credentials on financing costs has been limited by the wider economic picture of the past two years, rising regulatory risks in 2024 should lead to greater scrutiny and potentially price differentials for issuers.”
About Insight Investment
Insight Investment is a leading asset manager focused on designing investment solutions to meet its clients’ needs. Founded in 2002, Insight’s collaborative approach has delivered both investment performance and growth in assets under management. Insight managed A1.6trn of assets as at 31 December 2021 across its core liability-driven investment, risk management, full-spectrum fixed income, currency and absolute return capabilities1. Insight Investment is owned by BNY Mellon, a global leader in investment management and investment services with USD$2.3 trillion in assets under management. Insight has a clear mission and purpose to offer investors a different approach to achieving their investment goals; one that prioritises the certainty of meeting their chosen objectives in contrast to the traditional focus on maximising return and minimising volatility. Insight takes responsible investment seriously. In our view, it is as an essential part of managing risk and deciding whether an investment is fair value. We were a founding signatory to the UN-supported Principles for Responsible Investment (PRI)6 in 2006 and have been improving the integration of environmental, social and governance (ESG) issues in our research processes for more than a decade. Where we identify material ESG risks, we also seek to engage to better understand the issues. In 2020, Insight was awarded A+ ratings across all the relevant categories in the PRI survey, reflecting our ongoing commitment to integrating responsible investment practices across all aspects of our business. More information about Insight Investment can be found at: www.insightinvestment.com
[1] https://www.insightinvestment.
[2] Drafted by ICMA, UNEP FI, UN Global Compact, Asian Development Bank and IFC https://www.icmagroup.org/
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