Europe’s dominance in the green bond market is fading amid record growth in China

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Europe’s dominance in the green bond market appears to be waning as supply in Asia-Pacific recovers, driven by growth in China.

European green bond issuance fell to $46.5 billion in the second quarter from $74.19 billion in the same period last year, according to the Climate Bonds Initiative, a green debt tracker. UK based. While Europe remained the largest contributor to green debt globally, its share of issuance fell to 41.7% in the quarter from 54.8% a year ago.

The supply of North American green bonds also declined significantly in the second quarter, falling to $9.40 billion year-over-year from $25.91 billion. The region’s share of global emissions fell from 19.1% to 8.4%.

Meanwhile, internationally aligned green bond issuance in Asia-Pacific hit its highest level yet, as new regulations and growing demand from global investors drove record supply from China. . Green bond issuance in the region totaled $39.15 billion in the second quarter, up from $29.44 billion in the same period last year. It helped Asia-Pacific increase its share of global green bond issuance to 35.1% in the quarter, from 21.7% a year earlier.

“China has been the main contributing factor to the [Asia-Pacific] growth in the region,” said Judy Li, EY’s sustainability manager for Asia-Pacific. A regulatory push in China to align sustainable debt with international standards is helping green bond issuers attract more international investors and will support the expansion of China’s green bond market, Li said.

Updated taxonomy in China

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An update to China’s green taxonomy last year was “an essential step in bridging the gap with international markets”, Li said. It saw the adoption of the internationally accepted principle of “don’t cause significant harm” and the removal of carbon-intensive projects, such as clean coal technology. The Common Ground Taxonomy, first published in November 2021 and updated in June, also helps issuers offer green bonds that align with China’s and the EU’s green benchmarks.

China-aligned international green bonds more than doubled year-on-year to $23.91 billion in the second quarter, cementing China’s position as the world’s largest issuer of green bonds in 2022.

Elsewhere, green bond issuance generally slowed compared to last year. According to Pietro Sette, research associate at MainStreet Partners, market volatility, reduced liquidity and interest rate uncertainty have driven up the cost of funds for issuers and caused many to postpone transactions. . The industrial sector, which analysts predicted would fuel supply growth this year, has been particularly lagging behind, Settle said.

In Europe, which has historically dominated the green bond market, issuers have increasingly turned to issuing sustainability-linked bonds, which, unlike traditional green bonds, are not reserved for environmental projects. specific. These securities, whose pricing is linked to predefined environmental, social and governance objectives, accounted for almost 30% of all European non-financial corporate bond issuance in the first half of 2022, compared to 19% at the end of 2022. same period a year earlier. , according to Scope Ratings. The agency expects European supply of ESG-related bonds to be around 29% of non-financial corporate bond issuance in 2022, while for North America and Asia, this figure should be around 5% and 6%, respectively.

Global green bond issuance reached $111.63 billion in the second quarter, down from $91.75 billion in the first quarter, but remains below the $135.41 billion issued in the second quarter of 2021.

The data covers bonds aligned with the definitions of the Climate Bonds Initiative. An additional $17.46 billion of green bonds issued globally in the second quarter of 2022 have been flagged by the Climate Bonds Initiative as unaligned, while $17.65 billion have yet to be categorized.

Future global growth

Analysts are optimistic that green bond issuance will resume across all regions once economic and market conditions become more stable.

“There is a big backlog” set said. “Companies are definitely ready to invest, but there is no certainty on the path of interest rates at this time.”

The trend of growing investor interest in sustainability is not skewed by current events, said Bram Bos, senior portfolio manager for green, social and impact bonds at NN Investment Partners. “The demand is still strong. Maybe there was a very short setback, but the trend is well in place, and it won’t change due to an ongoing war or political events,” Bos said.

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Regulatory initiatives should also fuel issuance growth in Europe, with the EU taxonomy giving the market more clarity on what qualifies as a green asset, the portfolio manager added.

“In some sectors it’s a bit more difficult to define what’s green and what’s not, for sure in industrials. So I think [the EU taxonomy] will also help accelerate issuance in the corporate sector, especially in Europe,” Bos said.

So far, the European Commission has published its first green taxonomy criteria covering sectors such as energy, forestry, manufacturing, transport and buildings. It should publish more criteria this year.

Bos also expects more issuance from the EU itself, as the bloc moves forward on its plans to sell green bonds worth 250 billion euros through 2026. EU green bond issuance amounted to 11 billion euros, or $12.36 billion, in the second quarter, although this is classified as supranational by the Climate Bonds Initiative, a separate category from l ‘Europe.

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