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Broader fixed income market conditions have adversely impacted sustainable bond volumes so far in 2022, as the Russia-Ukraine military conflict has impaired global economic growth prospects, stoked existing inflationary pressures and heightened the prospects for accelerated monetary policy tightening. These conditions contributed to our decision last month to revise our forecast for global sustainable bond issuance to approximately $1 trillion for the whole of this year, roughly in line with last year’s volume.
Despite the market headwinds this year, issuance trends have not been uniform globally. While global issuance of green, social, sustainability and sustainability-linked (GSSS) bonds totaled $203 billion in the first quarter of 2022 – down 11% from the fourth quarter of last year and 28% lower than the first quarter of 2021 – these trends were quite different among emerging market (EM) issuers. By way of comparison, EM GSSS bond issuance totaled over $34 billion in the first quarter of 2022, up 22% from the fourth quarter of last year and up 13% from the first quarter of 2021 (see Figure 1).
Although EM sustainable bonds were down off the record peaks of the second and third quarters of last year, and still accounted for a relatively small share of first-quarter global sustainable bonds at 17%, this was up modestly from the 15% share of global issuance observed for all of 2021. This relative strength in issuance follows a breakout year for EM sustainable bond volumes in 2021, when issuance more than doubled compared with the previous year.
Green bond issuance by EM issuers totaled $18 billion in the first quarter of 2022, while social bonds and sustainability bonds totaled $1 billion and $10 billion, respectively. Sustainability-linked bonds (SLBs) continue to emerge as the instrument of choice for many EM issuers, with $6 billion in Q1 2022 representing the second-highest quarterly issuance from this market segment to date and approximately 23% of global SLB issuance in the first quarter. Green bonds accounted for 52% of all EM GSSS bonds in the first quarter, the lowest quarterly share on record – a sign of increasing diversification in the types of sustainable instruments used across the EM universe.
While green bonds will remain the largest contributor to EM GSSS bond volumes over the next few years, similar to the broader sustainable bond market, other sustainable bond types will continue to flourish as EM issuers seek to finance a wider array of environmental and social projects. The breakout in SLB issuance observed in recent quarters will also likely continue given the challenges that some EM issuers face in having a sufficient amount of eligible projects to support benchmark use-of-proceeds sustainable bonds.
The diversification in EM sustainable bonds from a label and structure standpoint is just one potential growth driver in volumes in coming years. We are also seeing diversification from a regional standpoint as robust issuance in relatively newer sustainable bond markets around the globe is increasingly complementing sustained growth in more seasoned markets, such as China.
While Chinese GSSS bond issuance remained the largest component of EM issuance in the first quarter of 2022 at 41%, this was lower than the 50% share for all of 2021. From a regional standpoint, Asia Pacific issuers led EM volumes in the first quarter with a 53% share, down from their 60% share for all of 2021 (see Figure 2). EM volumes remained strong in Latin America at over $11 billion, the third-highest quarterly share to date and around one-third of global EM issuance, while volumes from EM issuers in the Middle East & Africa topped $3 billion, the largest quarterly share on record for the region.
We believe the recent surge in EM sustainable bond volumes will continue in the coming years, as issuers in these markets tend to carry relatively higher exposure to environmental, social and governance (ESG) risks and have significant sustainable development needs. Although near-term market headwinds will likely temper growth in EM volumes on a temporary basis, growth should resume over the longer term given the significant challenges faced by issuers in these markets.
Developing economies, for example, tend to be more highly exposed to the effects of physical climate change. And sustainable development needs are significant in EM economies, with estimates from the International Energy Agency showing that 70% of the investment required to reach net zero must flow into emerging markets and developing economies. EM sustainable debt markets can help bridge this funding gap, although investing in capacity building, creating robust investable pipelines and de-risking projects via blended finance mechanisms will be critical enablers. Against this backdrop, a continuation of the robust expansion in EM sustainable bond issuance in recent quarters looks assured in coming years.
In particular, we see strong growth potential for sustainable bonds from EM sovereigns and other public sector issuers. These issuers are at the forefront of dealing with the environmental and social challenges facing their economies, and will be paramount in financing their countries’ transitions to net zero, adaptation to growing physical climate risks and efforts to advance inclusive growth. For example, Egypt – which is set to host COP 27 in November – became the first country in the Middle East and North Africa to issue a sovereign green bond with its debut issuance in 2020. Proceeds from the issuance will go towards financing or refinancing eligible project categories including clean transportation, renewable energy, pollution prevention and control, climate change adaptation, energy efficiency and sustainable water and wastewater management.
Other notable examples of sovereign EM issuers bringing sustainable bonds to market in recent years include Philippines, Benin, Mexico, Colombia and Chile. We expect this trend will continue as EM issuers increasingly finance their sustainable development needs with labeled bonds. This may also serve to encourage broader sustainable bond issuance in these markets, as benchmark sovereign sustainable bonds can serve to encourage other public and private issuers to launch their own labeled transactions.