Optimism About ESG Bond Issuance in Europe Grows

The ESG bonds market closed 2022 with declines of up to 22 percent that were part of the broader slowdown in corporate bond issuance, but according to Scope Ratings, issuance of these fixed-income instruments has the tailwind to rebound in 2023.

“Securities linked to ESG criteria accounted for 30 percent of all European non-financial corporate bond issuance in 2022, compared to only around 25 percent in 2021,″ explained Eugenio Piliego, director at Scope Ratings.

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An expanded market share that, in Piliego’s eyes, “will probably remain stable this year”

According to data provided by the rating agencies, European ESG bond issuance in January was high, reaching around €15 billion.

A volume that is below nearly €21 billion was issued a year ago, but it has two strong points in its favor.

One is the fact that there is no sign of a new black swan causing a drop in activity during the year, as happened with the outbreak of war in Ukraine in February 2022.

And the other is that the 2023 issues were clearly higher than the €8.3 billion launched on the market in 2021, which speaks of the progressive increase in companies’ interest in this type of instrument.

Companies’ eagerness to take advantage of the demand for ESG bonds

As Scope Ratings explained, global corporate bond issuance fell sharply last year amid inflation, rising interest rates, and growing macroeconomic and market uncertainty, exacerbated by the war in Ukraine.

However, the agency stressed, “corporate treasurers were relatively comfortable issuing ESG-linked debt and are likely to remain so, judging by the increased activity in the corporate debt capital markets this year.”

A premise that they wanted to back up by pointing out that, so far in 2023, large European companies have been quick to come to the market for ESG-linked transactions.

This was the case of the French company Engie, which issued green bonds worth €2.75 billion, as well as the British company Thames Water Utilities Finance, which issued paper worth €1.65 billion, and also the airline Air France-KLM, which issued €1 billion.

In Spain, this trend could be seen in the €1 billion green hybrid bond issue carried out by Iberdrola, or in the hybrid green bond launched by Telefónica, which also went to the fixed-income market to issue €1 billion worth of ESG bonds.

Investors should still be careful when buying ESG bonds

Despite this good start in the ESG bond market, and the market’s optimism about the outlook for the rest of the year, it is important to remember what Andrés Sánchez Balcázar, head of global debt at Pictet AM, explained.

In the expert’s opinion, “green bonds have requirements that, in our opinion, are still a bit lax and allow issuers to allocate only a percentage of the issue to green projects.”

For this reason, Balcázar called for investors to evaluate the debt issuer as a whole before buying new green bonds, and to look at the use that each company intends to make of the proceeds from these new issues.

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