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The Climate Bonds Initiative (CBI) hosted their annual Climate Bonds Conference during the first week of September. The conference featured sustainable debt market participants from around the globe. Moody’s ESG Solutions had the privilege to sponsor CBI’s Markets Day with appearances from Patrick Mispagel, Head of Sustainable Finance at Moody’s ESG Solutions Group, and Ludovic d’Otreppe, Executive Director of Research at V.E., part of Moody’s ESG Solutions Group. The call to action from many speakers at the conference was clear, and in this report we present four key themes we observed throughout the week.
The sustainable bond market is booming in 2021, with the emergence of sustainability-linked bonds (SLBs) complementing the continued growth of use-of-proceeds green, social and sustainability bonds. Aggregate sustainable bond volumes stood at $660 billion in the first nine months of 2021, already eclipsing the $613 billion issued during all of 2020 (see Figure 1). We forecast total sustainable bond issuance of around $1 trillion for all of 2021, reflecting the rapid development of this market in recent years. Sustainable bond issuance remains heavily dominated by European issuers, but volumes are growing throughout the world as the market matures. Issuers across all sectors will continue to link their sustainability strategy with their capital markets strategy in response to persistently strong investor demand.
Despite impressive market growth, the challenges of climate change are urgent and investment needed to foster sustainable development is significant. As the devastating impacts of climate change become increasingly visible, the recently released UN IPCC sixth assessment report is an urgent call to accelerate efforts to reduce greenhouse gas emissions and invest in adaptation and resilience. On the sustainable development side, investment in the 17 UN Sustainable Development Goals (SDGs) will require US$ 5-7 trillion annually to shape real-world outcomes across wide-ranging environmental and social goals. The interrelationship between social and environmental factors will drive increasing innovation in social financing structures, including the use of sustainability bonds and sustainability-linked instruments. During the conference, institutional investors – such as members of the UN Principles for Responsible Investment (PRI) – discussed the use of the UN SDGs to effectively communicate social and environmental progress by corporates and sovereigns. It is clear that sustainable investing and the role of the financial sector will continue to grow, and support a renewed sense of collective purpose and ambition in tackling the most significant sustainable development challenges in the world today.
With sustainability rising on sovereign agendas, the number of governments issuing labeled bonds to finance their sustainable development objectives and reaffirm their Paris Agreement commitments is growing. Volumes are booming as countries pursue climate goals and address social inequalities in post-pandemic spending. Sovereign sustainable bond volumes, including the EU, stood at $120 billion as of September 16, already surpassing the $88 billion issued last year. Importantly, sovereign sustainable bonds have the potential to enhance market liquidity and encourage prospective public and private issuers to enter the market, which may have a multiplier effect on sustainable bond issuance in such markets.
Countries across all regions of the globe are launching innovative sustainable financing solutions. Representatives from Brazil, the European Commission, China and other countries were present at the conference and highlighted the need for climate resilience and utilizing the global debt market for immediate funding. Brazil is tapping into the private markets for agribusiness green loans with proceeds going to sustainable agricultural practices. Carbon sequestration from such practices can then be quantified into carbon credits and possibly traded in global carbon trading markets.
The European Commission spoke about the release of its NextGenerationEU (NGEU) green bond framework, for which V.E, part of Moody’s ESG Solutions, provided a Second Party Opinion (SPO). Green bonds issued under the framework will be used to finance around 30% of the Recovery and Resilience Facility, the centerpiece of the NGEU pandemic recovery plan. A representative from the China Development Bank discussed how the state-owned development finance institution is focusing on developing its sustainable bond market to meet the national carbon neutrality goal for 2060. Recent transactions from the China Development Bank include issuances of two carbon neutral bonds aimed at decarbonization the national economy.
One of the key areas for discussion during the CBI conference, and among sustainable finance market participants more generally, is financing the low-carbon transition. There is growing recognition that achieving global climate goals is not possible without deep decarbonization of the highest-emitting sectors. Panelists throughout the week outlined their organization’s net zero targets around greenhouse gas emission reductions. Still, assessing the robustness of key performance indicators and comparing companies’ transition plans within and across sectors remains a key challenge for investors. Building on existing market best practices such as ICMA’s Climate Transition Finance Handbook, CBI unveiled the discussion paper Transition finance for transforming companies at the close of the conference to highlight best practices for carbon-intensive companies looking to raise transition financing.
SLBs have emerged as the sustainable debt instrument of choice for many companies that may not have enough financeable green or sustainable projects today. However, as articulated in the Transition Day panels, the SLB market is still nascent and innovative structures are emerging, such as combined elements of the use-of-proceeds model (ringfencing of proceeds for specific projects) with a coupon step-up linked to company-wide sustainability goals. Many panelists indicated that they are hopeful that SLBs will be a vehicle for net zero transition in tandem with frameworks like the EU Taxonomy and the Common Ground Taxonomy being pursued by the EU and China, despite challenges around defining credible transition pathways.
Standardized ESG language and data has the ability to yield transparency and comparability. A common theme that resonated throughout the week was the importance of harmonized data standards in ensuring continued growth and credibility of sustainable debt markets.
A panel during the conference featured members of the Future of Sustainable Data Alliance (FoSDA), a diverse group of stakeholders with the directive to assess current market data and put forth recommendations to harmonize ESG data. The panel highlighted data as the building block of the ESG investing landscape. As mentioned by FoSDA member Ludovic d’Otreppe during the conference, there are significant gaps and holes in market data and often inadequate population of corporate disclosure in reporting frameworks. Efforts to enhance the comparability and robustness of underlying ESG data will support investor assessments of sustainable debt instruments, especially with respect to those focused on transition.