Headaches plague the sustainable bond hype

Growth in “GSSS” bonds — that is, green, social, sustainability and sustainability-linked — hit nearly 64% last year as issuances reached just under $1tn, according to Moody’s. Amid tightening monetary conditions, few would expect that pace of expansion to be repeated this year — but Moody’s predicts still rampant growth of 36%, taking total issuance to $1.35tn. That would give GSSS bonds a 15% share of the entire global bond market — well over double the figure just two years before.

However, there are plenty of complications dogging this young market. One surrounds assessment: in the absence of generally accepted, trustworthy definitions of what counts as green or sustainable, concerns about greenwashing could limit some investors’ enthusiasm for the market.

Then there are the concerns surrounding the fastest growing GSSS asset class: sustainability-linked bonds, or SLBs. Whereas green or sustainability bonds have their proceeds earmarked for specific projects, the terms of SLBs are linked to a company’s attainment of wider sustainability goals — cuts in carbon emissions, for example.

SLB issuance surged tenfold to $90bn last year, according to Moody’s — but the rating agency also warns of a headwind this year from rising scrutiny of standards in the space. The biggest concern has been around the minimal penalties for issuers who don’t hit their targets. But such concerns have yet to halt the rampant growth in the GSSS market, with investors still willing to accept lower interest rates on these bonds relative to conventional debt.