ESG debt issuance eyes new highs in 2021

By Daniel Wilson
Published June 9, 2021 | 5 min read

Global sustainable debt issuance soared US$700 billion in 2020, driven by a surge in funding for social-themed projects amid the COVID-19 pandemic. Product innovation and growing demand from investors and stakeholders are expected to propel the market higher in 2021.

Social and sustainable themes dominate new growth

The ESG-linked debt market reached US$1.7 trillion last year, with issuance nearly doubling 2019’s US$385 billion. Almost 10,000 instruments have been issued under ‘Green’ ‘Social’ and ‘Sustainability’ labels, according to Climate Bonds Initiative’s ‘Global State of the Market’ report.

While green remains the dominant theme, accounting for about 41% of issuance, social and sustainable themes comprised almost all of the growth in 2020, achieving higher volumes than all previous years combined. Sustainability-focused issuance saw sharp gains in 2020, with the market more than doubling to US$160 billion. However, social bond issuance spiked 10-fold to reach US$249 billion and now accounts for 36% of the ESG market. Much of the growth was driven by COVID-19, as issuers sought to address health and social concerns stemming from the crisis.

“The landscape is shifting for ESG issuance,” said Daniel Wilson, Vice-President Debt Capital Markets Asia Pacific at RBC Capital Markets.

“Green issuance is continuing to attract investment but social debt has become very front of mind and is showing potential for more significant growth.”

Sustainability-linked bonds broaden appeal for corporates

Lending support to growth is the emergence of instruments that eschew the traditional Use of Proceeds model which has underpinned most ESG debt. Sustainability-linked bonds, in which pricing is linked to the achievement of ESG goals, are appealing to corporates due to their flexibility, less onerous reporting requirements and freedom to use proceeds for general corporate purposes.

While still in its infancy, the segment is expected to broaden as stakeholders and regulators pressure organizations to transition toward measurable social and sustainable development goals.

“We’re seeing ongoing conversations with corporates or banks around what kinds of structures can be better suited to them rather than traditional structures which might be better for supranationals,” said Wilson.

More specific sub-themes are emerging in social finance, with issuance targeting projects ranging from public housing to gender equality.

Interest in social investment was underlined in Australia in April with the Asian Development Bank’s inaugural AUD Gender Bond, the country’s first from a Kangaroo (off-shore) issuer. RBC Capital Markets was co-lead on the 4.5 year bond issue which raised AUD$700 million to finance projects promoting gender equality and women’s empowerment. The Gender Bond struck a chord with Australian investors, who in the past have been more focused on green themes.

“It was the gender theme that jumped out at a lot of investors and the results of the issue highlighted that,” said Wilson.

Eligible projects for the proceeds of the ADB notes address one or more of five themes on a best-efforts basis, including:

  1. Women’s economic empowerment. Access to finance/credit; micro, small and medium-sized enterprise development; agriculture development; value chain support; financial literacy and entrepreneurship training.
  2. Gender equality in human development. Education, skills development and technical and vocational education and training, including “nontraditional” female subjects and/or job sectors such as science and mathematics, engineering, technology; sexual and reproductive health and rights; sanitation; prevention of gender-based violence.
  3. Reduced time poverty of women. Reduced drudgery and time spent on unpaid care and domestic work through basic infrastructure (transport, water, sanitation, energy) or affordable child, elderly or family care support.
  4. Participation in decision-making and leadership. Through community groups, local governments, and public and private sector management.
  5. Women’s resilience against risks and shocks including climate change and disaster impacts. Environmental protection and/or rehabilitation; flood and disaster risk management; budget support and social protection.

Australian debt market primed for diversification as pension funds demand ESG investment

While the Australian ESG debt market has lagged global peers, growth in issuance has been strong. A record A$10.21 billion was printed in 2019, before easing in 2020 (A$7.08 billion) amid the pandemic. Strength has returned to the market, however, and 2021 could set a new benchmark as institutions follow supranationals into the sector.

“The market in Australia has been driven by the supranationals but over time we’ve seen banks and corporates come to the fold. We’re seeing more focus from issuers in this sector,” said Wilson.

“There's a real desire for diversification.”

Much of the momentum is being driven by the country’s superannuation industry, as large superannuation funds push for more ESG investment in their portfolios and choose asset managers with a track record in the sector when allocating funds.

“The sector continues to evolve with investors looking for increased reporting and the ability to measure the impact that their investments are having on the respective projects,” said Wilson.

In addition to the ADB’s Gender Bond, RBC Capital Markets was co-lead manager on several ESG issues in Australia in 2021, including the European Investment Bank’s A$1.25 billion Climate Awareness Bond, the largest ever Australian dollar-denominated green bond by an SSA (supranational, sub-sovereign and agency).

In March, RBC co-led on an inaugural social bond by Kangaroo issuer NRW Bank which raised A$350 million for refinancing sustainable projects for housing, business and municipalities in the west German state of North Rhine-Westphalia.

The issues have helped RBC remain top of the Kangaroo Sustainable Bond league table and place third on the Australian Sustainable Bond league table.

While still maturing, the ESG debt market is poised to transform the way organizations operate and allocate capital toward sustainable projects. After record global issuance in 2020, innovation in product structures and investable themes will be catalysts for further growth in 2021 as companies seize the ESG opportunity.

Daniel Wilson

Daniel Wilson
Vice-President, Debt Capital Markets, Asia Pacific,
RBC Capital Markets, Australia