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Global markets 21 Jan 2020

Sustainable bonds: record-breaking issues and new shades of green in sight in 2020

2020 will be another exemplary year for the environmental, social and governance (ESG) bond market, with issuances expected to reach record levels, and the potential for innovative new structures in this growing asset category, BBVA Global Markets Research analysts say.

Since the inaugural deal by the EIB in 2017, the current size of the green, social and sustainable bond market has reached $694 billion. This represents 0.7 percent of all bonds in circulation on a global scale, although the relative market share for these products has continued to increase, reaching an average of 3.62 percent in 2019, compared to 2.62 percent in 2018.

In 2019, $250 billion of bonds were issued with the environmental, social or sustainable label – an $80 billion increase from 2018. This is primarily due to the increase in issues in Europe, which rose 65 percent compared to the previous year. With this progression, European issuances have increased their relative participation in global issuances from 46 percent in 2018 to 51 percent in 2019.

In light of this data, analysts at BBVA Global Markets Research are predicting that global issues of environmental, social and sustainable bonds will reach $320 billion in 2020. This represents a 28 percent increase compared to the registered volume in 2019.

This growth is expected to take place due to greater presence of European financial issuers in this market, motivated by the higher capital requirements, and of sovereign issuers, of which Spain and Germany are expected to be new participants.

Analysts at BBVA Global Markets Research are predicting that global issues of environmental, social and sustainable bonds will reach $320 billion in 2020

Also contributing to this increase will be the new transition bonds — bonds issued by companies that are not currently green, but which aim to embark on their sustainable transition in the future. These products are expected to increase their presence in the market after receiving the European Union’s support for the taxonomy.

Finally, European initiatives designed to increase loans for green mortgages are expected to boost issuances of green and social covered bonds, as will the issuing of more bonds tied to the United Nations Sustainable Development Goals, which BBVA experts anticipate could be related to social criteria and not the environment.

Institutions and central banks define new sustainable goals

Following months of negotiations, the European Commission, Parliament and Council have reached an agreement on the EU taxonomy. The concerns from several member states regarding the language of the “do no significant harm” principle — the reason for the specific exclusion of nuclear energy from the list of eligible activities — threatened to derail the process. However, amendments were made to soften the language, an agreement was reached among the three parties, and an updated version of the taxonomy including these changes is expected to be released in the first half of 2020 and enter into force in the first half of 2022.

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Following months of negotiations, the European Commission, Parliament and Council have reached an agreement on the EU taxonomy

The European Banking Association (EBA) has a mandate to prepare a report on the potential for preferential prudential treatment of loans with a significant environmental or social impact. In other words, a supportive environmental factor for financial institutions that would reduce capital consumption for banks that are more active in sustainable/environmental lending. However, this report is not expected to be delivered until 2025, and the application of this treatment is not expected to take place until several years later. BBVA GMR analysts say it is a reasonable timeline, given the current status of bank disclosure of the ESG credentials of their loan portfolios.

Nevertheless, the EBA is expected to continue facilitating a series of consultation papers throughout 2020 on financial institutions’ disclosure of their exposure to sectors with a more critical impact in terms of the environment and sustainability. This is part of the framework of transparency regulatory requirements for financial institutions (Pillar 3) and the integration of considerations related to ESG in risk management and supervision.

Central banks across the world are increasingly more aware of financial systems’ vulnerability to climate-related risks. Created in 2017, the Network for the Greening of the Financial System (NGFS) is a global network comprised of 48 central banks and supervisors that aims to foster collaboration among other global institutions and the members of this network in order to better understand and mitigate climate risks.

The analysts at BBVA Global Markets Research see four possible ways that central banks could help financial systems mitigate and adapt to climate risks, given their role in the financial system. These include regulation of the financial system; monetary policy; management of their own portfolios; and administration, getting different members of the financial system involved in collaborative efforts and information and knowledge sharing.

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