Emerging markets GSSS bonds hit all-time issuance high

Green bond issuing in emerging markets increased by 34% year over year, according to French asset management giant Amundi, tracking with an overall strong rebound in sustainable finance debt issuance in developing economies (DE) last year.

Bonds issuance in the broader category of Global Green, Social, Sustainability and Sustainability-Linked (GSSS) bonds exceeded US$1 trillion (AU$1.5 trillion) in 2023, figures from Amundi’s sixth edition of the Emerging Market Green Bonds Report show, reversing a 2022 slump and matching the all-time high reached in 2021.

Emerging market GSSS bond issuance also reached a first-time high of US$209 billion (AU$315 billion), surging 45% in the year to the end of 2023.

Outside of China, GSSS bond issuance in emerging markets, which overall rose by 65%, was driven by a surge in green bonds, which alone increased by 81%. In the Middle East and North Africa, most notably UAE and Saudi Arabia, green bond issuance more than doubled.

Meanwhile, in China alone, GSSS bond issuance advanced by a more modest 28%, reaching around US$98 billion (AU$148 billion).

“This marks an impressive bounce back from the slump in sales seen the previous year when inflation stifled demand among investors who were worried about the declining value of their bond holdings, while rising interest rates prompted borrowers to put their capital raising plans on hold,” Amundi wrote.

The report authors attributed the growth largely to governments and private businesses stepping up their action to combat climate challenges in developing economies, as well as, for investors, a recognition of a maturing of the asset class as an established part of the international financial system.

However, DM-based emerging market borrowers are also increasing their uptake of GSSS bonds to meet financing needs, which according to Amundi, suggests a more fickle green bonds market that will, ultimately, “wane over time”. Moreover, Amundi also recorded a bounce back in GSSS bond market sentiment after the inflationary stress of 2022.

Amundi predicts continued strong growth for emerging market GSSS bonds issuance over 2023–2025, with an annual growth rate of 7.1%, with sales volumes rising to $240 billion (AU$362 billion) from the $209 billion (AU$315 billion) currently.

For the green bond sub-category, growth will be faster still, at 7.5% per year to reach US$156 billion (AU$235 billion) in 2025.

“This outlook, with a 70% probability, assumes no reversal in investor demand for sustainable assets alongside emerging market sovereign and corporate borrowers stepping up efforts to finance climate commitments,” Amundi wrote.

Amundi notes that market growth is being supported by favourable financial and regulatory conditions in EMs.

“Market growth is being supported by ongoing progress by market supervisors in establishing guidelines for categorising, regulating, and tracking sustainable finance in multiple jurisdictions. This means sustainable finance markets in developing economies are becoming deeper, easing the way for more investment capital to buy up debt issued in those markets.”

Where are green bond investments going?

The largest slice of the money raised from green bond instruments – which are exclusively targeted at projects designated as having a positive environmental impact – in emerging markets during 2023 was designated for renewables, reaching a 37% share. This was broadly stable relative to the previous year.

The next biggest destination for green bond sales was in buildings and construction, claiming 29%, surging from 9% the previous year.

Construction, Amundi noted, remains “a central pillar of many emerging economies as well as a major source of greenhouse gas emissions”.

Water projects, driven by the sale of ‘blue bonds’, have also become increasingly important, representing 12% of issuance in 2023, up from 8%.

Meanwhile, low carbon transport saw its contribution fall to 11% from 18% in 2022.