Khanchit Khirisutchalual

As demand for ESG investments and financing continues to grow, Moody’s ESG Solutions forecasts still-strong growth in sustainable bond issuance once again in the coming year.

In a new report, the firm forecast that US$1.35 trillion worth of green, social, sustainability and sustainability-linked bonds will be issued in 2022, representing an estimated 15% of total global bond issuance.

While the forecast total would be a 36% year over year increase, this marks a slowdown from the 64% growth in issuance last year.

“Our projections reflect expectations of gradually declining growth rates as the market matures, and potential headwinds from monetary policy tightening,” the report said.

Green bonds are expected to account for about half of the total new issue activity (US$775 billion), followed by sustainability and sustainability-linked bonds (US$225 billion and US$200 billion, respectively), and US$150 billion in social bonds.

In its report, Moody’s ESG said that, while pandemic-driven issuance of social bonds has started to decline, investor demand to have a positive social impact will help drive innovation in social financing.

At the same time, “market participants are increasingly focused on the linkages between environmental and social factors, suggesting that social issues will remain an important factor in sustainable financing,” it said.

Green issuance will continue to be driven by growing “net zero” commitments, along with increasing demand for “climate adaptation financing” as the physical risks of climate change continue to materialize, the report suggested.

“Increasing frequency and severity of extreme climate events is heightening the need for adaptation and resilience financing,” it said.

“While very little financing has gone to these projects to date — with just 3% of green bond proceeds allocated to adaptation projects in 2021 — we anticipate this funding will grow as elevated risks demand greater financing for these projects,” it noted.

At the same time, carbon transition risk is rising too, it said, “as changing economics, shifting policies and heightened investor attention accelerate transition plans for many companies.”

Additionally, Moody’s ESG reported that green issuance in emerging markets (EM) surged last year, following several years of stagnation — and that trend is expected to continue this year.

“We believe EM sustainable bond markets will continue to surge given heightened ESG risk exposures and significant sustainable development needs in many EM economies,” it said.