Global green bond issuance is expected to rebound in 2023 amid supportive policies, a more certain interest rate environment and a catch-up of postponed issuances from last year, according to analysts.

This comes after a 25.6% decline in green bond supply in 2022.

In China, the top nation for green bond issuance last year, efforts to standardize the market will spur growth in 2023, said Jianheng Chen, head of fixed income research at Beijing-based CICC Research. China's Green Bond Principles, published in July 2022, unify the criteria within the country and set standards that are more in line with international practices, he said.

In the U.S., President Joe Biden's Inflation Reduction Act will support green bond issuance and investment, Bram Bos, lead portfolio manager for green, social and impact bonds at Goldman Sachs Asset Management, said in a Jan. 3 analysis. The act, signed into law in August 2022, will provide some $386 billion in energy and climate spending over 10 years, with related tax incentives of about $265 billion from the prior trend rate, Bos said.

A catch-up of green bond issuances postponed from 2022 will also help to drive supply this year, Bos said in an interview. He expects a "regional shift" in the Europe-dominated market, with a growing share of the U.S. and emerging market issuers.

Volatile markets, uncertainty

Globally, issuers sold $443.72 billion worth of green bonds in 2022, down from $596.30 billion in 2021, according to data from the Climate Bonds Initiative, a U.K.-based green debt tracker. Issuance by sovereigns was down 38.1% year over year, while supply from nonfinancial corporates dropped 35.8%.

Green bond issuance in the fourth quarter of 2022 came in at $83.64 billion, a 15.9% decline from the previous quarter and the lowest level since the second quarter of 2020. It came as volatile markets, inflation, rising interest rates and geopolitical uncertainty raised the cost of borrowing and cooled investor appetite across the broader bond market.

"The market conditions made it really challenging," said Bos, as issuers like an "environment where rates and spreads are stable."

In Europe, green bond supply was down 32.5% to $219.03 billion in 2022, while issuance plunged 43.2% to $60.22 billion in North America.

Asia-Pacific issuance was more stable, falling 2.5% in 2022. It was the second-largest issuer on a regional basis, with $120.83 billion of green bonds for the full year, helped by China's push to align sustainable debt with international standards and growing demand from global investors.

Green bond issuance in China reached $76.25 billion in 2022, followed by Germany at $60.77 billion and the U.S. at $49.00 billion.

"Comparing ESG bond issuance to total corporate supply reveals that the fall in supply has likely not been driven by a lack of desire from companies to issue, or demand from investors to buy," said Charlotte Edwards, head of ESG FICC research at Barclays, in a Jan. 4 note. "Instead, we think the slowdown has been driven by the broader decline in corporate bond issuance."

Barclays expects corporate green bond issuance to grow by more than 30% in 2023 and reach levels similar to those of 2021. Amid rising interest rates, issuers will likely favor green bonds over sustainability-linked bonds when adding environmental, social and governance labels to save on financing costs, Edwards said. This is partially due to the better premium attached to green bonds.

Analysts have previously anticipated sustainability-linked bonds to be the fastest-growing asset class in the ESG debt market. Yet, according to Barclays analysts, these instruments "have lost their mojo" due to greenwashing accusations and concerns over legal repercussions from including sustainability key performance indicators in their bond documentation.

While sustainability-linked bonds remain a popular choice for issuers in high-emitting and lower-rated companies, Barclays analysts no longer expect such strong growth in this segment of the market.

Economic recovery needed

The growth of the green bond market this year will depend on a recovery of the global economy, said Yoshihiro Fujii, executive director at Tokyo-based Research Institute for Environmental Finance. Global economic growth is projected to slow to 3.2% in 2022 and 2.7% in 2023, from 6.0% in 2021, according to International Monetary Fund.

China's economic expansion in the fourth quarter slowed down to 2.9%, from 3.9% in the previous quarter. Growth in 2022 is at 3.0%, down from a government target of about 5.5%.

Some issuers, particularly private companies, may "stay on the sidelines" in anticipation of further rate rises, while others may rush to issue at current rates, said Tamami Ota, a senior researcher at Daiwa Institute of Research.