Investment Institute
Asset Class Views

2023: The year of green, social and sustainability bonds? Three reasons to be optimistic

  • 16 March 2023 (7 min read)

Key points

  • The transition to net zero requires massive investment, bringing new potential opportunities for investors in green, social and sustainability bonds
  • We believe such bonds are well positioned to benefit from an improving economic environment, attractive valuations and growing investor appetite
  • It is important to remain selective and invest in meaningful projects from credible issuers

2022 was a very challenging year for the bond market and sustainable bonds were no exception. Yet, there are reasons to remain optimistic about the asset class; the green bond market showed resilience and offered interesting investment opportunities which continued to drive investor appetite despite the high volatility. 2023 might be the year of the bond market revival.1 Uncertainties remain high but there are growing signs that headline inflation is abating, growth is coping better than expected and central banks’ tightening cycles might soon come to an end. This context should be particularly favourable to the green, social and sustainability bond market.

As regulation steps in and strengthens scrutiny over sustainable investment, green, social and sustainability bonds should further benefit from the transparency they provide. Looking at green bonds, our research has demonstrated the carbon intensity of the projects financed are, on average, less than half that of the companies issuing the bonds.2 Therefore, they are fulfilling their primary role of financing projects with a positive impact on the environment while also offering investors a market that is liquid3 and growing in its potential to achieve large tradeable volumes.

We have identified three reasons for optimism for the green, social and sustainability bond market in 2023:

A very dynamic market

Amid 2022’s turbulent economic conditions, green, social and sustainability bonds still registered $606bn of new issuances,4 mainly driven by the green bond market, which accounted for almost $400bn of issuance. 2022 managed to keep apace with 2021’s record in terms of issuance volumes in the green bond market, and the year welcomed an additional 115 new issuers.

Credit accounted for more than 50% of total issuances for the third consecutive year, thanks to an increasing sector diversification coming from the real estate, automotive, consumer goods and telecommunication sectors. Meanwhile, sovereign issuance continued to pick up, with countries such as Austria and Canada issuing their first green bonds.

This reflects not only the credibility of green bonds when it comes to supporting the financing needs of the net zero transition but also that every sector is progressively investing in the transition. Looking ahead, there are reasons to believe this sector diversification should also be accompanied with greater regional diversification. One could expect higher issuance for US corporates, especially on the back of the US Inflation Reduction Act, while emerging market issuance should continue to pick up as a successful global transition cannot be achieved without significant investment in the area.

The social and sustainability bond market dynamic was a bit more nuanced. Yet, it is worth highlighting that we saw the first social bond issuance from a real estate company, potentially paving the way for more corporate bond issuances from the segment. Meanwhile, digging into the sustainability bond dynamic, it is worth noting the strong contribution of US dollar issuances compared to green and social bonds which remain dominated by euro issuances. These dynamics continue to bring a wide range of diversified potential investment opportunities from both a sector and geographical perspective.

Attractive valuations

The rebound in yield levels at the end of 2022 has helped valuations look increasingly attractive. In the short term, the picture remains uncertain: Central banks continue to pursue their tightening cycle to bring both headline and core inflation down and the bond supply pipeline looks incredibly heavy over the first quarter. Yet, the long-term picture looks more and more compelling for the bond market and should be particularly beneficial to the green, social and sustainability universe given its credit exposure and sensitivity to interest rates.

Indeed, we believe that some of the factors that explained the underperformance of the green, social and sustainability bonds universe compared to conventional bonds in 2022 will reverse in 2023. The universe currently enjoys an attractive yield pick-up compared to conventional bonds and looks better positioned to benefit from a decline in yields and compression of credit spreads.

Growing investor appetite

Sustainable strategies have benefited from growing investor appetite over recent years. As regulation tightens, it is crucial to be able to continue to demonstrate the credibility of these strategies. Green, social and sustainability bonds offer a very appropriate instrument which combines transparency and measurability of the projects funded. We believe this should be particularly beneficial to the asset class and potentially attract both new investors and new issuers.

The transition to net zero requires massive investments over the coming years. For example, a recent study5 showed an extra $3.5trn a year is needed in capital spending on physical assets for energy and land use systems to meet 2050 targets. Initiatives such as RePowerEU or the US’s Inflation Reduction Act are likely to support these investments and should be beneficial to the asset class.

On the social side, the strikes and cost-of-living-related challenges are exasperating the inequalities across populations. Alongside this, low-income households in developed and developing countries are on the front line when it comes to bearing the cost of both climate change disasters and a transition to net zero. With this in mind, we could see a resurgence in social bonds in 2023 with a growing focus on the social pillar.

If the perspectives are positive for the market, investors should nevertheless remain cautious when investing in sustainable bonds. The crux is the ability of asset managers to invest in meaningful projects from credible issuers though a strong analysis. The capabilities of the asset manager are key here and therefore we have developed a powerful framework that allows us to be very selective on this market.

Finally, we will closely follow and contribute to the evolution of the regulation pertaining to the upcoming green then social taxonomies, how they will work with the Sustainable Finance Disclosure Regulation (SFDR) and the current local ones – no doubt we will all need to adapt, but these should not impede our increased ambition to contribute to a green and just transition.

  • T3V0bG9vayAyMDIzOiB0aGUgYm9uZCBtYXJrZXQncyByZXZlbmdlPyB8IEFYQSBJTSBDb3Jwb3JhdGUgKGF4YS1pbS5jb20p
  • UyZhbXA7UCBUcnVjb3N0LCAyMDIy
  • SG93IGxpcXVpZCBpcyB0aGUgZ3JlZW4gYm9uZCBtYXJrZXQ/IHwgQVhBIElNIFVLIChheGEtaW0uY28udWsp
  • QVhBIElNIC8gQmxvb21iZXJnLCAyMDIy
  • aHR0cHM6Ly93d3cubWNraW5zZXkuY29tL2NhcGFiaWxpdGllcy9yaXNrLWFuZC1yZXNpbGllbmNlL291ci1pbnNpZ2h0cy9maW5hbmNpbmctdGhlLW5ldC16ZXJvLXRyYW5zaXRpb24tZnJvbS1wbGFubmluZy10by1wcmFjdGljZS8gVGhlIG5ldC16ZXJvIHRyYW5zaXRpb246IEl0cyBjb3N0IGFuZCBiZW5lZml0cyB8IFN1c3RhaW5hYmlsaXR5IHwgTWNLaW5zZXkgJmFtcDsgQ29tcGFueQ==

Related Articles

Asset Class Views

Global Factor Views: Positive on Growth and Quality but warning signs for Momentum

Asset Class Views

The ubiquity of uncertainty and long-term investment opportunities

Asset Class Views

Multi-Asset Investments Views: Bad news on the way… and therein lies the good news

  • by Andrew Etherington
  • 04 March 2024 (7 min read)

    Disclaimer

    This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).

    This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.