S&P Global Ratings expects global issuance of sustainable bonds--including green, social, sustainability, and sustainability-linked bonds--will surpass $1.5 trillion in 2022. We believe sustainability-linked bonds will be the fastest-growing segment of the market. Green bonds will also see record issuance volumes in 2022, maintaining their position as the dominant sustainable bond category. Finally, we expect continued growth of social and sustainability bonds as they diversify into new projects in support of the 2030 SDG agenda. Growth in these markets will be a result of significant investor demand, regulatory developments to help standardize the market, and issuers' desire to diversify their investor base and potentially obtain favorable pricing terms.

While sustainable bonds still make up a relatively small part of global bond issuance, it is increasing rapidly--to 11% of global issuance in 2021, from less than 5% three years earlier (see chart 2). In 2022, we expect this share will grow to approximately 17% of total 2022 issuance. This growth will persist despite stagnating global issuance volumes (see "Global Financing Conditions: Bond Issuance Looks Set To Contract 2% This Year As Monetary Policy Tightens," published Jan. 31, 2021).

Chart 1

Chart 2

Chart 3

Sustainability-Linked Bonds Will Grow The Fastest

We believe the sustainability-linked bond market has substantial headroom for growth.   As the issuer pool diversifies across sectors, geographies, entity sizes, and credit quality, new issuers will have more financial incentives to advance their sustainability goals and agendas. Because proceeds are typically not ring-fenced for specific environmental or social projects, sustainability-linked instruments have proven more flexible and accessible than use of proceeds instruments for a variety of issuers. This includes issuers in the retail, consumer products, and business and consumer services sectors, as well as those in hard-to-abate sectors such as oil and gas, chemicals, aviation, and shipping (see chart 4).

Chart 4

In addition, speculative-grade issuers, which have historically made up a relatively small part of the sustainable bond market, are showing increased appetite for sustainability-linked bonds. For example, through Dec. 31, 2021, sustainability-linked bond issuance reached €16.30 billion in Europe, according to Leveraged Commentary & Data (LCD), showing tremendous growth since the first issuance in March 2021.

Chart 5

Furthermore, in April 2021, German real estate and mortgage bank, Berlin Hyp, became the first financial institution to issue a sustainability-linked bond with a target to reduce its loan portfolio's carbon intensity 40% between 2020 and 2030. The issuance was shortly followed by one from China Construction Bank, which issued a $1.15 billion sustainability-linked bond tied to a sustainability performance target (SPT) of achieving a ratio of 10% green loans to adjusted gross loans and advances to customers by 2023. We also believe structured finance issuers may increasingly adopt sustainability-linked structures given challenges in identifying suitable collateral needed for use of proceeds issuance (see "Global Structured Finance 2022 Outlook," published Jan. 12, 2022).

We believe there are still many issuers that have yet to tap the sustainability-linked bond market, and expect continued innovation in transaction structures and diversity of key performance indicators (KPIs) and SPTs, providing substantial upside for further growth. Because sustainability-linked bonds cater to a broader set of issuers, we think they will continue to be complementary to the use of proceeds bond market. We also expect to see the sustainability-linked and use of proceed issuance formats being used more frequently in combination through new and innovative issuance formats. Some examples include:

• Ukrainian power company NPC Ukrenergo's $825 million green and sustainability-linked bond issued in November 2021. The proceeds will be used to finance or refinance eligible green projects, including renewable energy, grid infrastructure, and energy efficiency. The coupon rate is tied to Ukrenergo's success at increasing the installed capacity of wind and solar plants in Ukraine.
• Bank of China Ltd.'s $300 million "re-linked" bond issued in November 2021. The proceeds will be used to finance or refinance an underlying portfolio of sustainability-linked loans. The coupon rate is tied to the loans' performance.

Furthermore, we believe there are major opportunities for public sector issuers to enter the sustainability-linked bond market, led by sovereigns.   Sovereign sustainability-linked bonds could be a useful tool to address climate change and nature loss according to the World Bank, which recently proposed new standards for sustainability-linked sovereign bond issuance. The Principles for Responsible Investment (PRI) also recently released a statement suggesting sovereigns issue sustainability-linked bonds tied to human rights factors. Challenges around data quality and timeliness and attribution of ESG factors that may be out of sovereigns' control indicate the pick-up of sovereign sustainability-linked bonds may be slow. That said, we predict that if sustainability-linked issuance takes root in the public sector, it will be a major turning point for the market, providing additional liquidity and crowding in further private sector issuance.

We expect KPIs to remain heavily weighted toward greenhouse gas (GHG) emissions in the near term as issuers ratchet up their emissions reduction plans, but become more diversified and innovative.   Scope 1 and 2 GHG emissions reduction represents about 70% of all KPIs used to date (see chart 6). In our view, this is largely due to the availability of scope 1 and 2 emissions performance data, making it easier to compare against peers and industry standards (see "Navigating The Strengths, Challenges, And Best Practices In Sustainable Finance Frameworks And Transaction Documentation," published Jan. 18, 2022). That said, we believe appetite from investors for issuers to set KPIs that are more closely tailored to their industry's ESG challenges will grow. We are already starting to see some evidence of this occurring. For example, KPIs linked to scope 3 emissions reduction are gaining traction--22 issuers, many of which operate in asset-light sectors where value-chain emissions are most material, tied KPIs to scope 3 emissions in 2021 compared to only one issuer in 2020.

We also believe better sustainability disclosure will be a key driver of KPI diversity because issuers will have more data across ESG factors, which they can translate into diverse, relevant, and comparable KPIs and SPTs.

Chart 6

That said, most SPTs expire in 2025 (see chart 7), leaving investors with limited information about issuers' success improving their sustainability performance in line with targets. To address this gap, we believe investors may start to demand intermediary targets between issuance and when the SPT expires. In our view, intermediary targets, currently used by only about 20% of sustainability-linked bond issuers according to our research, provide more transparency on sustainability efforts and target ambition. Efforts to further establish and encourage transparency will also be critical in 2022 to ensure the credibility of the sustainability-linked market.

Chart 7

Use Of Proceeds Bonds Are Booming, With No Signs Of Slowing Down

Green bonds are still the dominant use of proceeds category

We believe green-labeled bond issuance will set another record in 2022 driven by momentum from the U.N. COP26 summit.  In the lead up to and during the conference, many countries committed to increasing their emissions reduction targets and stepping up their decarbonization plans to help achieve 1.5°C (see "Mind the Gap: Pledges at COP26 Give Hope but Significant Shortfall Still Exists," published Nov. 18, 2021). We believe these commitments will drive future green bond issuance and help green bonds maintain their position as the dominant sustainable bond category. In particular, we think sovereign bond issuance to finance green projects, including sustainable infrastructure and renewable energy, will likely accelerate further. In 2021, countries such as the U.K., Italy, and Spain issued their first sovereign green bonds, all of which attracted record investor demand. These successful debuts pave the way for new entrants such as China, Canada, Denmark, and New Zealand, which have each suggested that they may enter the sustainable bond market in 2022. New sovereign issuance will also provide liquidity and benchmark pricing for local issuers, including those in the private sector, unlocking further green finance opportunities.

The EU and U.S. will lead the green bond markets.   A significant driver of green bond issuances in 2022 will come from the EU, after it started its five-year, €240 billion green bond program in October 2021 as part of its €800 billion Next Generation EU recovery fund. The €12 billion green bond debut under this program was more than 11 times oversubscribed, making it the largest green bond ever issued and the largest single order book to date. We think EU issuers will maintain their leadership share in the green bond market, reflecting the region's unique regulatory and political push in the field of sustainable finance. U.S.-based issuers have also been leaders in the green bond market over the past few years, a position we expect them to maintain. President Biden has made his commitment to renewable energies and infrastructure clear through his Bipartisan Infrastructure Law and proposed Build Back Better Framework. Combined, these two initiatives represent an over $500 billion investment in green projects. In November 2021, the U.S. also announced it would support the Climate Investment Funds' new financing mechanism, which aims to narrow the clean infrastructure gap in developing economies by issuing green bonds and then disbursing them through multilateral development banks across low- and middle-income countries.

Chart 8

The private sector will consolidate its green bond leadership even further.   Global campaigns such as Race to Zero and Race to Resilience established around the time of COP26 aim to catalyze action from thousands of nonstate and corporate actors by committing them to achieving net zero carbon emissions by 2050 at the latest. Crucially, these initiatives also include interim targets to help entities track progress and accountability, which may increase corporate green bond issuance further in the short and medium term.

Chart 9

Social bonds: what's next?

We expect social bonds to still maintain a prominent share of the sustainable bond market, despite pandemic-related issuance tailing off.   In 2021, the COVID-19 pandemic propelled social bond issuance to new heights, with total issuance of about $188 billion up nearly 10x over 2019 levels. Issuers and investors were looking for innovative ways to address health risks, increase vaccine availability, protect jobs, or improve economic health. While we expect issuance related to COVID-19 response will start to decline as the immediate effects of the pandemic subside, other types of social issuance will emerge, with government agencies, government-sponsored enterprises, and supranationals leading the charge (see chart 10).

In our view, there is major untapped potential for public sector issuers to bring social bonds to the market as the transition for climate accelerates, social inequities come into sharper focus, and regulatory developments help drive more standardized definitions of social projects and activities. The economic fallout from the pandemic and the growing focus on the 2030 SDG agenda have made investors increasingly aware of the structural shifts occurring across societies, translating to heightened demand for socially minded investments. We think a more diverse range of projects could be financed through social bonds, including those that target gender and racial inequality, unemployment, broader social exclusion, and vulnerability to natural disaster risk.

Chart 10

We believe financial institutions will drive private sector social bond issuance, while nonfinancial corporate issuance will remain relatively muted.   While social bond issuance from the financial institutions sector is still small globally ($23 billion in 2021), we believe financial institutions will be key stakeholders in the market's development. Social bond issuance will offer financial institutions an opportunity to showcase their innovative financing schemes, while seeking to address the most important social issues globally. Some of the largest financial institutions globally have already been actively issuing social bonds (or defining social and sustainable financing frameworks that enable them to do so) to extend access to finance by lending to various target populations. We expect further growth from these types of financings will come from three main areas: financing for underserved micro, small, and medium enterprises to support business growth and employment, affordable housing (including social mortgages), and loans with a gender focus, specifically to empower women entrepreneurs.

On the other hand, we believe the contribution from nonfinancial corporate issuers to the social bond market will be relatively minor in the near term. This is partly because many corporates do not have enough capital or operating expenditures tied directly to projects or activities offering social benefits to which they could exclusively dedicate the proceeds of a social-labelled instrument. While some sectors (i.e. telecom, health care) may get creative in how they tackle social challenges through the social bond structure, we expect most corporates may instead choose alternative sustainable bond structures, such as sustainability or sustainability-linked bonds, to finance their social objectives. For example, many utility companies have issued sustainability bonds to finance a combination of green (e.g. renewable energy development) and social (e.g. diverse supplier programs) projects. We expect these trends to continue as the emphasis on the "just transition" accelerates, placing the onus on sustainable bond issuers to finance environmental and social projects or activities that are inclusive and equitable, ensuring that the benefits are shared evenly across the economy.

Unlocking transition financing

One market trend that hasn't picked up as we predicted is the use of proceeds transition bond market (see "Transition Finance: Finding A Path To Carbon Neutrality Via The Capital Markets," published March 9, 2021). In our view, such instruments have struggled to gain traction because the role of transition finance in the sustainable bond markets is still highly controversial. The market continues trying to coalesce around what "transition" really means and how it can be implemented without greenwashing. We still believe there is potential for issuers in hard-to-abate sectors to utilize sustainable bonds financing to transition their business models and activities, since there already are issuers like this in the sustainability-linked bond market. However, many market participants still disagree whether specific energy types, such as nuclear or natural gas, contribute to an environmental objective. This indicates that the debate over what constitutes a transition project, activity, or company will remain prominent over the coming years.

Emerging Markets Are Positioned To Propel Sustainable Bonds Forward

We believe the growth of sustainable bond issuance in emerging markets will be a key trend in 2022. Issuers in these regions arguably have the greatest need for such financing. Many are at the beginning of their ESG journeys, have outsized exposure to physical climate risks, and face greater social inequality, with limited resources to tackle these risks. We believe sustainable bond instruments could play an important role in financing progress on ESG issues and the SDGs across emerging market economies, serving as financial solutions to address the dual financing and sustainability gaps.

Emerging market sustainable bond issuance grew 140% in 2021, and we expect it will only accelerate further. Chinese issuers have dominated emerging market issuance (representing 60% of the total in 2021) and are expected to continue flocking to the sustainable bond markets in 2022 given China's easing monetary policies and government initiatives to widen the investor base and encourage bank lending to energy transition projects (see "China Green Bond Issuances Set To Cross $100B Mark In 2022," published Jan 19, 2022). Meanwhile, other issuers largely across Asia, the Middle East, and Latin America have also announced plans to enter the sustainable bond space. Saudi Arabia plans to issue its first green bond in 2022, an important step for the world's largest oil exporter, and Chile is considering issuing a sustainability-linked bond, according to Environmental Finance.

Efforts to harmonize ESG standards and regulatory frameworks with those of developed market peers will be critical to the growth of emerging market sustainable bonds. We believe progress here will encourage more local issuers to enter the market and stimulate investor appetite for the evolving asset class.

Chart 11

Regulatory Initiatives Will Bring More Harmonization And Clarity To The Global Sustainable Bond Market

Consistent global taxonomies and standards would allow investors to more easily compare their investments, and in our view will serve a key role in increasing issuer and investor confidence in the sustainable bond market. Regulatory developments surrounding company- and instrument-level ESG disclosure are rapidly coming to the fore.

All eyes are on the EU Taxonomy Regulation, which is a major step in creating a common language around sustainability as well as promoting greater availability and reliability of sustainability data and disclosures to investors and other stakeholders. The potential for an additional EU Social Taxonomy may help drive greater standardization and specificity in how social investments are defined, as well as guide issuers in how to measure and report on the delivery of their social objectives. In July 2021, the European Commission also proposed the creation of a voluntary European Green Bond Standard, designed to create a common standard for how public and private entities use green bonds. However, the EU's efforts have not been the only ones. In late 2021, China initiated a series of reforms specifically for green bonds, which could help enhance the quality of green bond evaluation and certification. The U.K. has also recently appointed a technical expert group to help create a U.K. Green Taxonomy, which will build on existing market taxonomies.

Furthermore, we believe regulatory efforts to mainstream sustainability reporting for corporates and financial market participants will be key for the growth of the sustainability-linked bond market. Such efforts include the EU's Sustainable Finance Disclosure Regulation and proposed Corporate Sustainability Reporting Directive. In addition, the U.S. SEC is currently working on a set of potential new disclosure rules, including on climate, human capital management, and board diversity to help promote more comparable and reliable sustainability disclosure.

Initial efforts have begun to create greater consistency and harmony across these regulatory frameworks, including the Common Ground Taxonomy announced in November 2021, which aims to improve comparability across the EU and China's sustainable finance taxonomies, as well as the proposed International Sustainability Standards Board, which aims to establish a common baseline for sustainability reporting internationally.

Looking Ahead

The sustainable bond market will continue to become more diverse and nuanced, with new sectors and issuers finding innovative ways to participate. Of course, efforts to further harmonize the market and make it more transparent remain critical to ensuring each sustainable bond instrument generates meaningful progress in sustainability. Greenwashing concerns will not go away, and the capital markets may eventually distinguish issuers that are able to make or deliver on their sustainability claims--both at the project or activity and broader entity level--from those that are not. However, over time, we believe there is room for every issuer to tap the sustainable bond market, indicating the market has much room to grow. In the meantime, investor demand for more detailed and consistent ESG disclosure, greater participation of external reviewers, as well as increased regulatory scrutiny will all benefit the market.

Related Research

• Global Financing Conditions: Bond Issuance Looks Set To Contract 2% This Year As Monetary Policy Tightens, Jan. 31, 2022
• Global Structured Finance 2022 Outlook, Jan. 12, 2022
• Economic Outlook Q1 2022: Rising Inflation Fears Overshadow A Robust Rebound, Nov. 30, 2021
• Mind The Gap: Pledges At COP26 Give Hope But Significant Shortfall Still Exists, Nov. 18, 2021
• Sustainable Covered Bonds: A Primer, Nov. 17, 2021
• Social RMBS: Is The Pursuit Of Housing Equality A Risky Business?, Sept. 1, 2021
• Sustainable Financing Opinions Analytical Approach, Aug. 25, 2021
• Sustainable Financing Opinions Analytical Supplement, Aug. 25, 2021
• The Fear Of Greenwashing May Be Greater Than The Reality Across The Global Financial Markets, Aug. 23, 2021
• Green Liquidity Moves Mainstream, July 8, 2021
• European Hospitals Turn to Sustainability-Linked Financing To Advance Their ESG Goals, July 1, 2021
• Credit FAQ: Green Mortgages And Green RMBS: What Are The Challenges?, June 28, 2021
• How Sustainability-Linked Debt Has Become A New Asset Class, April 28, 2021
• Transition Finance: Finding A Path To Carbon Neutrality Via The Capital Markets, March 9, 2021
• Sustainable Debt Markets Surge As Social And Transition Financing Take Root, Jan. 27, 2021