INSIGHT by Climate Bonds Initiative
Leading green finance not-for-profit, Climate Bonds Initiative (Climate Bonds), released a ground-breaking report on the pricing benefits of green and other labelled bonds. According to the report, all bond labels, including green, social, and sustainability, sustainability-linked and transition bonds (GSS+) offer pricing benefits compared to vanilla equivalents. The analysis – sampling bonds priced in the choppy market period of H2 2022- also revealed green bonds have a strong following of investors which helped get deals done in difficult in a faltering fixed income landscape last year.
From a sample of 72 green bonds with a combined face value of USD79bn priced between July and December 2022, Climate Bonds calculated green bond allocations to investors describing themselves as green or socially responsible reached a record 67%, on average. Multiple issuers reported this unique source of support helped get deals over the line in a period of high volatility where deals collapsed and stretches of days passed without new deals being priced. Auto manufacturers saw particularly strong support with allocations for ALD Automotive, Renault, and VW reaching at least 80% of green investors, with issuers remarking the success of the deal was helped by the green label.
Issuers can rely on this strong appetite from dedicated investors which has also undoubtedly contributed to the strong pricing dynamics we have consistently seen for green bonds over the past few years.
Climate Bonds has been surveying this data since 2017 on a semi-annual basis, and allocations have ranged from 45% in H2 2017, climbing to 67% in the most recent observation period, having been within two percentage points of that since H1 2021. This suggests that issuers can rely on this strong appetite from dedicated investors which has also undoubtedly contributed to the strong pricing dynamics we have consistently seen for green bonds over the past few years.
“Thematic bonds have issuers and investors head over heels for one another! Green and other labelled bonds carry huge demand, are regularly oversubscribed, and deliver results for issuers even as tough times cause fixed income to falter. As for investors, they’re throwing themselves at labelled bonds which offer transparent debt fit for the net-zero future,” said Sean Kidney, CEO, Climate Bonds Initiative.
“Thematic bonds have issuers and investors head over heels for one another! Green and other labelled bonds carry huge demand, are regularly oversubscribed, and deliver results for issuers even as tough times cause fixed income to falter.”
“Amidst a crucial decade for climate action, the labelled bond market really is the goose that’s laid the golden egg. With USD5trillion of annual investment needed by 2025 to avert environmental catastrophe, labelled bonds provide the catalyst to get capital to climate causes,” Sean added.
The report also includes a primary market pricing study of over 500 EUR and USD denominated bonds priced between 01 July and 31 December 2022, the results of which indicate bonds bearing thematic labels price tighter to their respective yield curves compared to matched vanilla equivalents. While there was sparse evidence of any bonds pricing through their yield curves during this period, the analysis suggests that on average, bonds bearing thematic labels achieved better pricing than those that did not. Of all the labels, green bonds, the largest group in the sample, exhibited the largest benefits with an average spread of 48bps compared to matched vanilla equivalents.
Read the report for a full breakdown green and other labelled bond of pricing dynamics
The Climate Bonds Initiative is an investor-focused not-for-profit, promoting large-scale investment in the low-carbon economy. More information on our website here.
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