Why green bonds are beating all expectations in the post-pandemic recovery

Green bonds are soaring in popularity as the world aims to ‘Build Back Better’ in the recovery from COVID-19, with their growth beating even the most optimistic expectations.

Issuance of green, social, sustainable and sustainability-linked bonds doubled in the first half of 2021, and in some cases tripled compared to the same period a year earlier, according to the Financial Times.

Governments, corporations and the financial community are upping the pace when it comes to supporting a sustainable and environmentally-friendly recovery from the pandemic, taking advantage of what the World Economic Forum sees as a “rare but narrow window of opportunity” to reset.

Green bonds are specifically designed to support climate or environment-related projects. Bloomberg Green found that the value of green bonds issued in the first six months of 2021 exceeded that for the whole of 2020, at $248.1 billion.

Sustainability bonds, which are issued to finance or re-finance green and social projects, have done even better, surging from $71 billion throughout 2020 to $90.4 billion in the first half of this year.

Less widespread but also fast-growing are sustainability-linked bonds. These set specific sustainability performance targets that increase the bond interest due if the beneficiary does not meet them. Targets might include the amount of recycled materials used in manufacturing by a certain date, or the share of renewable energy generated by a utility. This year, $40 billion have been launched, compared to $9bn in the same period last year, the FT reports.

Similarly, social bonds, which raise money to promote positive social outcomes, tripled in value this year compared to the first half of 2020, according to the FT.

For green bonds, the acceleration is most pronounced in Europe, according to a report from International Finance Review based on Refinitiv data. This is without counting in the NextGenerationEU stimulus package, which will run from mid-2021 to 2027 and see around €250 billion of green bonds issued.

China and the US are the most active markets. China accounted for 13.2% of the green bond market while the US made up 12.8%. Germany, which has recently adopted a new sustainable finance strategy, followed with a 12.2% market share and France with 10.9%.

This surge is set to continue as governments and corporates further sharpen their focus on a sustainable recovery, and investor demand continues to be strong.

Bank of America has reportedly increased its full-year forecast for green and social bond issuance to $900 billion from $750 billion, while the Institute of International Finance is expecting sustainable debt to exceed $1 trillion this year - 30% more than in 2020, led by green bonds.

Several factors will play a role in sustaining the growth of the sustainable finance sector.

One of these is country and regional stimulus packages such as NextGenerationEU. Another is policy initiatives at the supranational and local levels, such as Europe’s new Sustainable Finance Disclosure Regulation, which aims to redirect capital into sustainable investments, or the US International Climate Finance Plan.

At the same time, the finance industry, companies and investors still have a lot of room to take action themselves, as sustainable finance is still only a small slither of the entire debt market. What is more, there is a large investment shortfall that needs to be closed: in infrastructure alone; that gap is $15trillion, according to the G20 Global Infrastructure Outlook.

However, there is still a lot of work to be done to make these investments more transparent and standardized, as well as improving reporting so that investors can commit their funds with more confidence.

And more needs to be done to get investment to emerging markets, which currently represent less than 15% of the sustainable debt universe - underscoring how much room there is to grow.