Green forest
iStock / Moeru Matsunoo

While market headwinds have dimmed the outlook for sustainable bond issuance globally, in emerging markets the prospects for new issue activity still look bright, according to Moody’s ESG Solutions.

Last month, the firm revised its forecast for global sustainable bond issuance down, citing factors such as geopolitical conflict, inflation and rising interest rates, which are weighing on global growth.

In the first quarter, global issuance of green, social, sustainability and sustainability-linked bonds was down 11% from the fourth quarter of 2021, and off by 28% from the same quarter last year.

Yet emerging market sustainable bond issuance topped US$34 billion in the first quarter, up 22% from Q4 2021, and 13% higher than Q1 2021.

Specifically, green bond issuance totalled US$18 billion in the first quarter. Social and sustainability bond issuance reached US$1 billion and US$10 billion, respectively. And sustainability-linked bonds raised US$6 billion.

The report said that sustainability-linked bonds are emerging as “the instrument of choice” for many emerging market issuers, with new issue activity in the first quarter representing the second-highest quarterly total on record.

Green bonds accounted for just over half of the first quarter activity, marking its lowest quarterly share. Moody’s ESG said this represents “a sign of increasing diversification in the types of sustainable instruments” in the emerging markets.

The report indicated that green bonds will likely remain the largest segment of the new issue activity over the next few years, but that other sustainable bond types “will continue to flourish as emerging market issuers seek to finance a wider array of environmental and social projects.”

This increased diversification represents one potential growth driver in the years ahead, the report said, as does growing geographical diversification.

“[R]obust issuance in relatively newer sustainable bond markets around the globe is increasingly complementing sustained growth in more seasoned markets, such as China,” it said.

Additionally, emerging market issuers have higher exposure to ESG risks and significant sustainable development needs, which should underpin issuance volumes in the years ahead, the report said.

“Developing economies, for example, tend to be more highly exposed to the effects of physical climate change,” it said, estimating that “70% of the investment required to reach net zero must flow into emerging markets and developing economies.”

“In particular, we see strong growth potential for sustainable bonds from emerging market sovereigns and other public sector issuers. These issuers are at the forefront of dealing with the environmental and social challenges facing their economies, and will be paramount in financing their countries’ transitions to net zero, adaptation to growing physical climate risks and efforts to advance inclusive growth,” it said.

Sovereign sustainable bond issuance may also encourage broader issuance in emerging markets, the report said, “as benchmark sovereign sustainable bonds can serve to encourage other public and private issuers to launch their own labeled transactions.”