Sustainable Bonds: ticking the transition box
Published
September 2024
- Sustainable Bonds issuance hitting record high in H1 with focus on Climate oriented projects
- Climate oriented Sustainable Bonds issued in H1 meeting Transition criteria
Sustainable Bond issuance (including Sustainable-Linked Bonds and Municipal Bonds) bounced back strongly in the first half of the year, with a particularly strong Q1 (recorded quarter) followed by a solid Q2.
With issuance in the first half of 2024 already exceeding 50% of full year 2023, the stage is set for a potential resumption of the overall growth trend in Sustainable Bond issuance after the interruption of the past couple of years.
While Green bonds remain the dominant category, there are other interesting trends developing, including strong Transition Bond issuance growth in H1, taking this category's share of Sustainable Bond issuance to 3.47%. Although Transition Bonds still only represent a small proportion of the Sustainable Bond market, this recent surge of issuance activity appears consistent with the general expansion of the Transition investing theme we’ve noted since the beginning of the year.
Given investor focus on Transition investing, we have examined the Use of Proceeds for the Sustainable Bonds issued in H1 in more detail. As might be expected, Transition Bonds have a high concentration on Climate orientated projects, representing 67% of the issue amount. Use of Proceeds analysis across all categories of Sustainable Bonds issued in H1 reveals a similar significant skew towards Climate projects (see Figure 1).
Source: ICE. Notes: There is a high concentration of Use of Proceeds in Climate orientated categories.
Using the ICE Sustainable Bonds Dashboard, we note that of the Sustainable bonds issued in H1 where Use of Proceeds information is available, 53% have at least one climate orientated goal (Climate Change Adaptation, Renewable Energy, Clean Transportation, Eco-Efficient Products, Energy Efficiency, Green Buildings).
Of the climate categories, Renewable Energy is the most popular attracting 17.65% of bond proceeds, followed by Clean Transportation where 12.07% of proceeds are reported to be heading.
Analysis of the climate performance of companies issuing Climate orientated Sustainable Bonds also reveals some interesting results. Climate orientated issuers from across all types of Sustainable Bonds do not necessarily have a low carbon footprint currently. In fact, their carbon intensity (tCO2e/$m Revenue) tends to be above that of the broader sustainable bond issuers and ICE Global Broad Market Index.
[Figure 2] Carbon footprint (tCO2e/$m Revenue) of Sustainable Bonds vs. benchmark
Source: ICE. Notes: Sustainable Bonds with non-Climate Use of proceeds have a lower carbon footprint (tCO2e/$m Revenue) than other categories, including Climate Orientated Bonds.
Green and Climate orientated bond issuers in our example have similar Scope 1 and 2 intensities, all significantly above the global benchmark. This contrasts with non-Climate related issuers, where the carbon intensity is significantly lower, and well below our benchmark, especially for Scope 1 and 2 emissions as well as for Scope 3. This result may seem counterintuitive but can be explained by the types of Climate related bond issuers.
Our analysis finds that Climate orientated Sustainable Bond issuers tend to be in higher intensity industries, such as Energy and Utilities, where there is demand for projects to meet the Net Zero commitments required to help with the global transition to a Net Zero economy.
Indeed, outside of the Financial sector, which tends to be the main issuer type across all categories, Utilities companies are the largest issuers of Climate orientated Sustainable Bonds representing over 15% by issue amount in H1 of this year. By contrast, Utilities companies’ issuance of non-Climate orientated Sustainable Bonds was less than 1%, barely registering on our chart.
[Figure 3] Sector weights (% by value) of climate related issues vs. non-climate related issues
Source: ICE. Notes: Outside of the Financials sector, Climate orientated Sustainable Bond issuers are concentrated in the Utilities and Industrials sectors
But when it comes to transition investing it is not just current carbon footprints, but future climate alignment and the potential to decarbonise allowing companies to meet their climate targets that is important.
Despite the current higher carbon footprint of Climate orientated Sustainable Bonds, these issuers display good levels of alignment to Net Zero pathways together with relatively lower ITR scores compared to the non-Climate related Sustainable Bond issuers and our global benchmark.
[Figure 4] Cumulative emissions divergence (%) from NGFS net zero pathway (Scope 1 & 2)
Source: ICE. Notes: Climate orientated Sustainable Bonds show a closer alignment to the NGFS Net Zero 2050 pathway than non-Climate Sustainable Bonds and our global benchmark.
These characteristics suggests Climate orientated Sustainable Bonds are eligible for Transition investment strategies, which could help to explain the growth of issuance in this area since the beginning of the year.
According to the ICE On-Track with Targets Indicator, Climate orientated Sustainable Bond issuers are also deemed to be on-track with their Scope 1&2 targets and partially on-track (within 20%) with their Scope 1,2&3 targets combined. By contrast, non-Climate related Sustainable Bond issuers are seen as currently not on-track with their targets across all emission scopes.
[Figure 5] Cumulative emissions divergence (%) from NGFS net zero pathway (Scope 1 & 2)
Source: ICE
Overall, the relatively higher levels of alignment to Net Zero pathways and the “On-Track with Targets” status suggests that Climate orientated Sustainable Bonds are potential candidates for inclusion in Transition strategies.