Report: Value of global green bonds issued up 15% to $587 bn in 2023

26 / 06 / 2024

By Marwa Nassar - -

The value of green bonds issued grew 15 percent to $587 billion in 2023, from $509 billion in 2022, representing two thirds of sustainable bond issuance, according to the World Investment Report 2024.

Looking at use of proceeds categories, this strong growth – reversing 2022 trends – was mainly driven by increases in the energy, transport, information and communication technology, waste and industry sectors.

The increase was also supported by a recovery in sustainable bonds issued by financial corporates to $163 billion, eclipsing the record highs of 2021, and by non-financial corporates to $172 billion, which was just short of the 2021 high point of $174 billion.

Notably, sovereign issuance jumped 45 percent to $120 billion in 2023, up from $83 billion in 2022 and surging past the previous all-time high in 2021 of $92 billion. In a year of declining values for some sustainable equity investments, the rising demand for green bonds in 2023 could be the result of investors looking for lower risk routes to gain exposure to sustainable sectors and/or emerging markets, in addition to a general rebalancing towards fixed income in an environment of higher interest rates.

Research by the Climate Bonds Initiative has shown that investors are willing to absorb a “greenium” (lower yield and/or higher price) that is usually associated with green bonds, indicating the strength of demand for green versus traditional bonds (Climate Bonds Initiative, 2021).

On the supply side, the rise in sovereign issuance may be helping countries to diversify their investor base and provide credibility to green policies.

Energy, transport and buildings accounted for 75 percent of the green bond market in 2023.

Sustainable bonds were the main driver of growth in sustainable capital market products. Issuance climbed to $872 billion, a 3 percent rise from 2022, bringing the cumulative value of the market since 2018 to more than $4 trillion.

The sustainable finance market continues to grow. In 2023, the value of sustainable investment products, encompassing bonds and funds, reached more than $7 trillion, a 20 percent increase from 2022. Although the picture is nuanced, the overall positive trend in the sustainable finance market points to continued investor confidence and the resilience of sustainable investment strategies.

Despite continued growth in number and asset value, though, sustainable funds experienced strong headwinds in 2023. Net inflows dropped from $161 billion in 2022 to $63 billion in 2023.

Greenwashing remains the most significant challenge to the sustainable fund market as only 20% of “green fund” portfolios are exposed to climate-positive assets.

Global issuance of green, social, sustainability and sustainability-linked bonds has grown fourfold since 2018. As a share of global bond markets, the sustainable segment represented 5 percent in 2023, unchanged from 2022.

However, the near-record levels of issuance of green bonds and sustainability-linked bonds were offset by falls in issuance of social and sustainability bonds – partly related to the phasing out of social and sustainability bonds related to the coronavirus disease (COVID-19) pandemic (generally referred to as COVID-response bonds) – which contributed to a slowing in the five-year compound annual growth rate of the sustainable bond segment.

All four types of sustainable bonds are fixed-income securities designed to target sustainable outcomes while offering a financial return to investors. Green, social and sustainability bonds are generally tied to the financing of a specific project or use of proceeds, whereas sustainability-linked bonds instead integrate in their design a level of sustainability performance (such as greenhouse gas (GHG) emissions).

Green bonds raise funds specifically for projects with environmental benefits, such as renewable energy or pollution prevention, with issuers providing transparency on how the proceeds are used. These bonds are typically linked to assets and backed by the issuer’s balance sheet.

Historically, the focus has been on direct financing of physical assets and projects and indirect financing thereof (e.g. loans to suitable assets or projects). Social bonds raise funds for projects with positive social outcomes, such as education, health care, affordable housing and employment generation, especially for underserved or marginalized communities.

Issuers of social bonds also commit to transparency regarding the use of proceeds and the impact of the projects funded, ensuring that investors can see the social benefits derived from their investments.

Sustainability bonds combine elements of both green and social bonds to finance projects with both environmental and social benefits.

The proceeds from these bonds are used to fund a diverse range of initiatives, such as renewable energy projects, water conservation, sustainable agriculture, affordable housing and health-care facilities.

Sustainability bonds are also designed for investors looking to support comprehensive projects that contribute to the Sustainable Development Goals. Like green and social bonds, issuers of sustainability bonds provide transparency and reporting on the allocation of proceeds and the impact of the projects financed, ensuring accountability and alignment with sustainability objectives.

Sustainability-linked bonds tie the cost of financing to key performance indicators of sustainability. These bonds differ from green, social and sustainability bonds in their structure and objectives. Whereas traditional green, social and sustainability bonds focus on financing or refinancing projects that have specific environmental or social benefits, sustainability-linked bonds are uniquely characterized by their performance-based approach. The financial or structural characteristics of the bond (such as the interest rate) are directly linked to the issuer’s achievement of predefined sustainability targets.

Transparency and credibility are maintained through regular reporting on progress towards the targets and through third-party verification to ensure objectives are met, making these bonds a powerful tool for promoting sustainability in finance.