Barclays: ESG bond sales set to top $460 billion in 2023

Global sales of corporate bonds with environmental, social and governance (ESG) targets are set to surge this year after a challenging 2022, and could top $460 billion according to Barclays.

ESG-related bond volumes have steadily increased in recent years but dropped by 22% in 2022 amid a broader slowdown in corporate bond issuance, as companies struggled to navigate turbulent macroeconomic waters, with significantly higher borrowing costs as global central banks sought to address inflationary pressures.

Corporate ESG bond issuance fell to $362 billion last year from $461 billion a year earlier, Barclays said in a credit research note.

However, the bank expects ESG bond sales to grow by 30% this year and rebound to almost the same levels of 2021, predominantly driven by green bonds.

“We expect green bond issuance to continue to dominate the market thanks to strong demand and a long list of green projects that need funding as companies put decarbonisation plans into action,” Charlotte Edwards, head of ESG FICC research at Barclays, said in the note.

Among ESG debt options, green bonds’ dominance is yet to be challenged by a newer type of instrument, sustainability-linked bonds, which carry penalties for borrowers if they fail to meet certain targets.

Companies can secure cheaper financing through green bonds, Barclays said, and their relative appeal has increased relative to the less mature market of sustainability-linked bonds (SLBs), as investors have shied away the key performance indicators used in these. 

“Volumes may have been stunted by concerns from investors around greenwashing in the market (due to concerns around unambitious targets, immaterial KPIs and small penalties),” Edwards said.

Issuance of SLBs fell to $60 billion from $95 billion in 2021, according to the note.

ING agrees that the issuance of sustainability-linked bonds is still not really taking off in the banking segment, noting recently that “thus far only one bank printed a EUR sustainability-linked preferred senior unsecured note, with a reduction of the carbon intensity of the bank’s loan portfolio as a sustainability performance target. This contrasts sharply with the corporates segment, where nowadays about a third of the sustainable bond supply is in the SLB format.”

ING added that the proceeds of sustainability-linked bonds are used by issuers for general purposes, but the characteristics of the bond (such as the coupon) can vary depending on whether the issuer meets its predefined ESG performance targets.