Europe will remain a major hub for the green bond market even though IRising interest rates and geopolitical uncertainty following Russia’s invasion of Ukraine weigh on new issues.
Germany and France became Europe’s largest issuers of green bonds in the first quarter of 2022. Germany leads the region with $15.9 billion in internationally aligned green bond issuance, followed by France with $7.6 billion, according to data from the Climate Bonds Initiative, or CBI. .
The EU intends sell 250 billion euros of green bonds until 2026 via its European NextGeneration program. It raised 12 billion euros from the first issue in October 2021.
“Europe has been the main driver of the development and growth of the green bond market, and we don’t see that changing in 2022,” said Trevor Allen, head of sustainability research at Markets 360, the market strategy and economics division of BNP Paribas.
The Nordic region is also a key area to watch in Europe, Allen said.
Issuance of green bonds down in the first quarter amid uncertainty
Europe sold $45.80 billion in internationally aligned green bonds in the first quarter of 2022, down 23.9% from $60.16 billion a year earlier, according to data from the CBI. Including green bonds aligned only to local standards, total issuance on the continent was $56.94 billion during the quarter.
Europe was the region that contributed the most green debt globally during the quarter, according to CBI data.
The weak first quarter ended a multi-year growth streak in the global green bond market, propelled by zero net commitments from many countries. While many central banks are raising interest rates to tame inflationary pressures, funding costs for green bond issuers have risen and created uncertainty for investors, analysts said. Weaker the outlook for the global economy due to Russia’s invasion of Ukraine also affected the financing of energy transition projects.
“Geopolitical risk and interest rate volatility create uncertainty, which tends to naturally dampen primary market activity,” said Sam Morton, head of European investment grade research at Invesco’s fixed income unit. “However, we still expect growth in the sustainable finance market.”
Rise of sustainability bonds
Financial companies accounted for 57.5% of European green bond issues, according to CBI data, with non-financial companies in charge of 30.1%. This is compared to 35.5% for financial firms and 23.4% for non-financial firms a year ago.
An increase in corporate sustainability debt issuance is expected in 2022, driven by an increased supply of sustainability-related bonds, according to Morton.
S&P Global Ratings also expects sustainability bonds to be fastest growing segment of the sustainable bond market in 2022, he said in a report, noting that the market will continue to diversify and nuance. Unlike traditional green bonds, sustainability bonds are not confined to specific environmental or social projects, thus offering more flexibility to issuers.
“Growth in sustainable debt issuance is widespread, but France, Germany and Italy have led the way in 2022,” Morton said.
Harmonization efforts regulatory frameworks and environmental, social and governance standards will also bring more clarity to the market, according to Ratings.