Green bond issuance has already reached new monthly highs in March. With a week left to go, issuance so far this month totals EUR 48 billion, up from the previous record of EUR 44 billion that was set in September 2020. This record-breaking figure is bolstered by strong sovereign issuance as governments invest in a green recovery. Green bonds should continue to attain new highs in the coming year, according to NN Investment Partners (NN IP), given their attractiveness to issuers and the strong financial returns they offer.
As a result of the stronger-than-expected green bond issuance so far in 2021, NN IP has raised its projection for full-year issuance to EUR 400 billion (see figure). This would push the global green bond market well above EUR 1 trillion by year-end. “Much of this record-breaking issuance represents planned issuance from 2020 that was postponed as a result of the pandemic,” comments Bram Bos, lead portfolio manager green bond at NN IP. “Now that we’re on the path to stability, issuers are refocusing on the future and on the ongoing climate crisis.”
Growth in global green bond issuance since 2013, and projected 2021 issuance
Source: NN Investment Partners
Sovereign issuance makes up a large part of the new issuance, as Italy entered the green bond market for the first time in March, while France issued its second green bond during the month. Other countries, such as Spain and the UK, are expected to tap the market for the first time later this year. “Many governments are seeking to play the green recovery,” adds Bos. “Green bond issuance can help them raise capital for implementing their infrastructure plans, while simultaneously bringing them closer to achieving their targets under the Paris Agreement.”
Green bonds look set to remain attractive to issuers for the foreseeable future, given current market dynamics. Green issues are increasingly trading inside their regular bond yield curves, demonstrating their appeal to investors, who are willing to pay a so-called greenium for access to these bonds. This in turn makes the green bond market more attractive to issuers, as they face lower borrowing costs.
In addition, green bonds should maintain their appeal to investors because they still provide stronger financial returns than regular bonds. “Since 2014, the Bloomberg MSCI Euro Green Bond Index has outperformed the Bloomberg Euro Aggregate Index by about 0.30% per annum,” explains Bos. “So even if green bonds trade a few basis points inside regular yield curves, they still outperform regular bonds, as well as contributing to a greener future.”
