Sustainable Debt in the Energy Sector

For the first time in the past seven years, environment, social, and governance-oriented sustainable borrowings declined in 2022 but continued to be substantially high, compared to 2020, particularly thanks to creditors for corporate energy and utilities. Despite a minor decline from 2021, corporate issuances in the energy industry have been over twice as high as in 2020, demonstrating the continuing increase in demand. Regardless of concerns about the actual effects, sustainability-related bonds (SBs) continue to account for the greatest portion of offerings (40%) in the large group of labeled debts, marginally ahead of green bonds. 

2023 is projected to continue to see an elevated rate of issuances, based on recent developments in China, the EU and the US. Additionally, the main investor of corporate bonds – the European Central Bank – has pledged to invest in environment-focused issues. This will likely lead to big polluters paying greater margins while continuing to highlight the economic advantages of green issuances. As per a study conducted by the International Energy Agency (IEA), in most emerging market developing nations, green debt issuances continued to occur predominantly in USD and EUR or other overseas currencies and developed countries continued to account for the largest share of issuances. 

 

Movements in Green Taxonomies

2022 witnessed some significant developments in the issuance of sustainable credit. The Common Ground Taxonomy (CGT) was introduced in mid-2022, along with the Green Bond Standards of China. CGT was the result of an in-depth study by a task force established by the EU and China in mid-2020 for conducting an extensive review of the current sustainable taxonomies. The group pointed out the distinctions and similarities in their strategies and outcomes. China’s green bond rules are expected to support the expansion of China’s largest green bond market. Besides, positive regulatory and legislative changes in the global economy are likely to buoy green bond issuances in nations including the US. One such example is the US Inflation Reduction Act, 2022, which offers financing programs and opportunities to hasten the clean energy transition and is expected to significantly increase the installation of facilities for green energy supplies.

Sustainability-related bonds

SBs offer a means for corporations and governments to enter the green finance market, particularly those in industries that find decarbonization a challenge. The bonds are like conventional bonds but boast a special feature, which allows the interest rate at which payments are made to an investor to alter depending on whether the bond issuer has achieved particular sustainability goals, such as a drop in overall emission levels. The bonds are open to a wider spectrum of businesses and governments that find it difficult to determine adequate initiatives required to comply with the restrictions on the utilisation of funds. 

Although benefits are associated with SBs, they do not demand rigorous disclosures regarding the use of the funds, as opposed to green bonds. This raises questions on the legitimacy of the economic advantages derived by investors for investing in bonds that may not meet the targets.

Figure 1

SEQ Figure. Sector-specific Sustainability-linked Bond Issuances

Screenshot 2023 08 08 093059

Source: 
Acuity Knowledge Partners and IEA analysis based on 2023 Bloomberg New Energy Finance (BNEF) records

Government Debt

Since its inception in 2017, government bonds, also known as sovereign bonds, have increased materially (14% share in the sustainable debt market as of March 2023 from 4% in 2017). 

Governments can benefit from sustainable credit because of extended periods and favorable rates. The majority of government green debt offerings have garnered less interest than comparable conventional debt instruments. These government offerings can be especially helpful in nations with moderate income where the financial strain is still substantial but getting subsidized loans is difficult. In addition to serving as a valuable source of public funding, governmental issuances are essential to the growth of regional investment markets. The green premium has helped government green bonds in emerging market nations, proving its worth as a valuable tool for countries with substantial financial loads.

Figure 2

Government Debt as a Share of Sustainability Debt

Screenshot 2023 08 08 091527

Source: 
Acuity Knowledge Partners and IEA analysis based on 2023 Bloomberg New Energy Finance (BNEF) records

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