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Impact Bond Analysis

Q2 2022

Published

August 2022

Authors
Anthony Belcher
Anthony Belcher
Head of Sustainable Finance
ICE Data Services
Michelle Wong
Michelle Wong

Regulatory Research Specialist

Executive Summary

Global issuance of impact bonds was US$382.3 billion in H1 2022, down 16% from the same period a year earlier. Lackluster monthly issuance since February 2022 recovered briefly in May, supported by sizeable issuances from European governments, before falling again in June. The movement is largely in line with the broader fixed income market, with the percentage of impact bonds versus general bond issuance remaining broadly consistent, ranging between 2% and 4% over the past six months.

For the purposes of this report, we define impact bonds as green bonds, social bonds and sustainable bonds that are either declared as such by the issuer or certified by a third party. All data and charts are based on data obtained by ICE Data Services and available via its product offerings.

Zooming into a regional breakdown, EMEA remained the largest issuing region of impact bonds despite a 21% drop in issuance, launching a total of US$168.6 billion in the first two quarters. The region also issued the highest percentage of impact bonds relative to general non-impact bonds. Among all bonds issued by EMEA entities, 4.3% of them were impact bonds, compared with just 1.8% in APAC and 0.8% in the Americas.

Meanwhile, APAC was the only region showing a year-on-year growth in issuance when all other regions saw a drop. A total of US$124.4 billion of impact bonds were issued by the region, 36% up from H1 2021. China doubled its issuances from H1 2021 and contributed to half of the APAC’s issuance, becoming the world’s largest issuing country of impact bonds in H1 2022. The percentage of China’s certified bonds still lagged global peers, which verified almost all their impact bonds by a third party.

Globally, green bond issuance continued to thrive with a total of US$248 billion launched in H1 2022, up 10% from H1 last year. Regulators have been creating and refining taxonomies to address greenwashing, but the same level of success was not observed in social bonds.

Global Issuance of social bonds spiked between 2020 and 2021 amid the increased focus on social issues at the height of the pandemic, but showed signs of receding in the first half of 2022, dropping 53% year on year to US$58.9 billion in H1 2022. Issuance dropped back to levels consistent with issuance pre-pandemic with issuances from supranational entities 90% lower to US$5.3 billion. France’s issuance was 56% lower to US$18.1 billion, though the country remained the largest issuer of social bonds in H1 2022, with French government-related entity Caisse d’Amortissement de la Dette Sociale (CADES) alone launching a combined €16 billion (US$16.6 billion) of social bonds during the first half of the year. Meanwhile, Asian countries like Korea and Japan have been issuing more social bonds. In Japan, where regulators have been actively setting guidelines and metrics for social bonds, issuance has increased 159% to US$6.4 billion in H1 2022.

Diminishing activity from supranational entities and EMEA governments have seen a drop in the overall issuance of government impact bonds globally. Government issuances fell 26% to US$186.6 billion, lower than US$191.8 billion from corporates for the first time since 2014. Supranational entities and EMEA governments reduced issuance by 54% and 40% respectively, surpassed by APAC governments who issued 64% more than last year. Noticeably, Bank of China issued the region’s largest green bond at CNY30 billion (US$4.5 billion) while Hong Kong government issued the world’s largest retail green bond at HK$20 billion (US$2.5 billion) in May.

Besides a shrinking amount of issuance, sovereign impact bonds, with longer maturities, also drove lower returns, amplifying the negative returns of the impact bond indices when compared to the broad market index. For example, the ICE Green, Social & Sustainable Bond Index saw a 13.25% year-to-June decrease in total return, while that of the ICE BofA Euro Broad Market Index fell 12.11%. ICE attributes the difference to the underperformance of the sovereign bond constituents under the impact bond index, which also had a longer average duration of 14.5 years versus 7.7 years of those under the broad market index.

The “Greenium” also appeared to shrink in Germany’s longer-term sovereign issuances, with the yield spread between the 10-year sovereign green bond and its conventional twin narrowing from 5.8 bps in January to 0.7 bps in mid-June as yields continued to rise. Yield spread of the 30-year sovereign green bond pair also narrowed from 3.7 bps to 0.9 bps over the same period.

Issuance

Global Issuance

[Chart 1.1] Dollar amount of impact bonds issued

[Chart 1.2] Number of impact bonds issued

[Chart 2.1] Dollar amount of impact bonds issued by month

[Chart 2.2] Number of impact bonds issued by month

[Chart 3.1] Percentage of impact bond issuance vs general bond issuance

The global issuance of impact bonds in H1 2022 was US$382.3 billion, 16% down from H1 2021. The amount of issuance in Q2 stood at US$189.4 billion, 14% lower compared with Q2 2021. The drop in issuances was largely in line with the broader market situation, with the percentage of impact bond issuances remained stable at around 2%-4% of all bond issuances including non-impact bonds (see chart 5.1 below).

Monthly issuance has remained low since February but appeared to recover temporarily in May with the highest total issuance amount since the start of the year. A total of US$87.5 billion of impact bonds were launched during the month, which was 46% of the quarter’s issuances and 23% of the half-year’s issuances in dollar terms. Issuances subsequently fell back to US$55.2 billion in June.

Issuance by Location

[Chart 4.1] Dollar amount of impact bonds issued by region

[Chart 4.2] Number of impact bonds issued by region

Issuances in H1 2022 has dropped in all regions, except for Asia Pacific, which has grown 36% year on year to US$124.4 billion. China alone has contributed to almost half of the region’s issuance during the period while doubling its issuance from H1 last year.

Nonetheless, EMEA remains to be the largest issuer in dollar terms, taking up 44% of global issuances. The region issued US$168.6 billion in H1 2022, albeit issuing 21% less year on year. Noticeably, issuances from supranational entities fell 54% to US$45.7 billion in H1 2022, despite issuing two of the largest bonds of the past six months. Issuance from Americas also dropped 15% to US$43.7 billion in the first half of the year.

[Chart 5.1] Percentage of impact bond vs general bond issuance

In addition to being the largest impact bond issuing region of H1 2022 by absolute dollar terms, EMEA also had the highest percentage of impact bond issuance relative to general bond issuance compared to APAC and Americas. Among all bonds (including non-impact bonds) issued by EMEA entities during the first half of the year, 4.3% of them were impact bonds. The percentage was 1.8% and 0.8% in APAC and Americas respectively.

The percentage of impact bonds in EMEA noticeably went up to 6.7% in May, supported by sizeable issuances from European national governments and government agencies. Some of the top issuances include a €5-billion social bond from French government agency Caisse d'Amortissement de la Dette Sociale (CADES), two €4-billion sovereign green bonds from Austria and France, and a €3-billion green bond from German government organization Kreditanstalt für Wiederaufbau (KfW).

Supranational entities have a much higher percentage than any of the regions, ranging between 15.3% and 33.7% over the past six months, highlighting their roles as coordinators and pioneers of global sustainable finance initiatives.

[Chart 6.1] Dollar amount of impact bonds issued by top 5 issuing jurisdictions of H1 2022

[Chart 6.2] Number of impact bonds issued by top 5 issuing jurisdictions of H1 2022

China was the largest issuer of impact bonds in terms of dollar amount and number of securities issued in the first half of 2022, doubling its issuance from H1 2021 to US$61.7 billion in H1 2022. The percentage of issuances certified by a third party in dollar terms has improved slightly from 77% in H1 last year to 81% this year. However, the percentage of certified bonds in terms of number of securities has remained unchanged at around 65%. The percentage is relatively low compared to countries like France, Germany and Korea which had close to 100% of their issuances certified.

Germany followed to be the second largest single country issuing the most impact bonds in dollar terms, launching US$44.3 billion in H1 2022 and showing a 13% increase from H1 last year.

France, which used to be the largest issuing country in H1 last year, has decreased its issuance significantly by 38% to US$40.2 billion in H1 2022. Issuance from supranational entities also fell by 54% over the same period.

Issuance by Bond Type

[Chart 7.1] Dollar amount of impact bonds issued by bond type

[Chart 7.2] Number of impact bonds issued by bond type

Global issuance of green bonds continues to grow in dollar terms while that of social bonds and sustainability bonds have both fallen. Green bond issuance grew 97% to US$248 billion in H1 2022, representing 65% of all types of impact bonds issued during the six months. Social bond issuance dropped 53% to US$58.9 billion and sustainability bond issuance fell 28% to US$75.2 billion.

Green bonds took off in 2020 and have continued to thrive with regulators actively designing and improving taxonomies to fight greenwashing, but social bonds did not share the same degree of success in terms of issuance.

Global issuances of social bonds had surged 10 times between Q1 2020 and Q1 2021, but has started to recede since then. The amount of issuance fell 67% from its peak in Q1 2021 to US$24.2 billion in Q2 2022. While the pandemic might have triggered market interest in social bonds, issuance is starting to normalize post-pandemic. A lack of standardized metrics or taxonomies around social projects might have been another hindrance to its development.

[Chart 8.1] Dollar amount of green bonds issued by top 5 issuing jurisdictions of H1 2022

[Chart 8.2] Number of green bonds issued by top 5 issuing jurisdictions of H1 2022

China continues to be the largest issuer of green bonds in H1 2022, growing its issuance by 97% to US$57.8 billion in H1 2022. In particular, Bank of China has issued a 30 billion-yuan (US$4.5 billion) green bond in February, which was the largest green bond issuance in the region.

The percentage of green bond certified by a third party by dollar terms also improved from 76% in H1 2021 to 83% in H1 2022, as the country continues to update its local taxonomy while seeking alignment with global standards. The Common Ground Taxonomy (CGT) first published by the IPSF in November last year has been updated in June, with additional climate change mitigation activities that share common ground for both the EU and China taxonomies. The first green debt instrument aligned with the updated CGT was issued by the Bank of China’s Frankfurt branch in June1.

Germany followed as the second largest green bond issuer, launching US$36.4 billion in H1 2022, 15% up from H1 2021. France reduced its issuance by 12% to US$16.9 billion over the same period.

Although overall impact bond issuance from supranational entities has almost halved, their green bond issuance has contrastingly increased by 175% to US$18.3 billion. Specifically, the European Union has issued two of the largest green bonds of H1 2022, including a €6 billion (US$6.3 billion) bond in April and a €5 billion (US$5.2 billion) bond in June.

[Chart 9.1] Dollar amount of social bonds issued by top 5 issuing jurisdictions of H1 2022

[Chart 9.2] Number of social bonds issued by top 5 issuing jurisdictions of H1 2022

Social bond issuance from France and supranational entities, which both experienced a spike of issuance in 2021, has receded significantly in the first half of 2022.

France has reduced its issuances by 56% to US$18.1 billion while supranational entities reduced by 90% to US$5.3 billion. Nonetheless, France remained the top issuer of H1 2022 in dollar terms, with CADES alone issuing a combined €16 billion (US$16.6 billion) of social bonds over the past six months.

Meanwhile, countries like Korea and Japan have been catching up. Korea became the second largest issuer of social bonds by dollar terms, launching US$9.4 billion in H1 2022, 12% up from H1 2021. Issuance from Japan has increased 159% to US$6.4 billion over the same period, as local regulator proactively develops social bond guidelines for the industry. Japan’s Financial Services Agency first published the guidelines in October last year2 and has recently drafted a set of indicators in June to assess the impacts of social bond projects. Both Asian countries also topped the list in terms of the number of securities issued.

[Chart 10.1] Dollar amount of sustainability bonds issued by top 5 issuing jurisdictions of H1 2022

[Chart 10.2] Number of sustainability bonds issued by top 5 issuing jurisdictions of H1 2022

Supranational entities continued to be the major issuer of sustainability bonds despite a 43% drop in issuance from H1 2021 to US$22.1 billion in H1 2022. International Bank for Reconstruction and Development launched the largest sustainability bond of the first half of 2022 at US$3 billion in March. US followed as the second largest issuer, launching US$7.4 billion in H1 2022, 20% down from H1 2021. Korea launched US$7 billion, down 28% over the same period.

Growth was, however, observed in France and Germany. France has issued 40% more sustainability bonds in dollar terms in H1 2022, launching a total of US$5.1 billion. Issuances from Germany edged up by 7% to US$4.6 billion over the same period.

Issuance by Issuer Type

[Chart 11.1] Dollar amount of impact bonds issued by issuer type

[Chart 11.2] Number of impact bonds issued by issuer type

The dollar amount of impact bonds issued by governments/agencies in H1 2022 has dropped 26% to US$186.6 billion, lower than US$191.8 billion by corporates for the first time since 2014.

In particular, supranational entities have reduced their impact bond issuance by 54% to US$45.7 billion in H1 2022, while that from EMEA governments dropped by 40% to $61.6 billion. Meanwhile, APAC has raised its issuance by 64% and became the top issuing region of government impact bonds during the six months, launching a total of US$69.8 billion. Bank of China issued the region’s largest green bond at CNY 30-billion (US$4.5 billion) in February while Hong Kong government issued the world’s largest retail green bond at HK$20-billion (US$2.5 billion) in May. Hong Kong’s retail issuances were well received and oversubscribed by 1.2 times3, implying potential of expanding the impact bond market to retail investors. Issuances from Americas also went up by 32% to US$9.6 billion.

Nonetheless, the biggest government impact bond issuances still come from European supranational or government entities, including two €6-billion (US$6.3 billion) bonds launched by European Union and CADES from France.

For corporate bonds, EMEA remained to be the largest issuing region of H1 2022 in dollar terms despite a 4% drop from H1 2021. Corporates from the region launched US$106.7 billion of impact bonds, representing 63% of global corporate impact bond issuances.

The largest single corporate issuance of H1 2022 was a US$2-billion social bond launched by Citigroup from the US. Americas as a region has launched US$34.1 billion of corporate impact bonds during the period, 23% down from H1 2021. Issuances from APAC corporates edged up 4% to US$51.1 billion.

[Chart 12.1] Dollar amount of impact bonds issued by issuer type

[Chart 12.2] Number of impact bonds issued by issuer type

The financial sector has contributed 46% of corporate impact bonds issuance of H1 2022, representing US$88.2 billion of issuances. It remained the top issuing sector of corporate bonds of the half-year. Financial institutions from EMEA have notably contributed to 60% of the sectors’ issuances.

Utilities followed as the second largest issuing sector of corporate impact bonds. Issuances has remained stable at around US$35 billion of issuance in H1 2022. Real Estate & REITs was the third largest issuing sector, with dollar amount issued dropping 30% from H1 2021 to US$24.2 billion in H1 2022.

[Chart 13.1] Dollar amount of impact bonds issued by issuer type

[Chart 13.2] Number of impact bonds issued by issuer type

Corporate issuers continue to be the major issuers of green bonds in H1 2022, although governments/agencies have been catching up, raising their share in green bonds issuances from 38% to 42%. The opposite was observed in social bonds. While government and agencies remain the top issuer of social bonds, corporates have been increasing their participation by raising their share of issuances from 14% to 32%.

US Municipal Issuance

[Chart 14.1] Dollar amount of impact municipal bonds issued

[Chart 14.2] Number of impact municipal bonds issued

US municipalities have issued US$20 billion of impact bonds in H1 2022, 17% up from H1 2021. In terms of number of securities, 2,573 impact bonds were launched in the first half of the year, 2% down from same period last year.

[Chart 15.1] Dollar amount of impact municipal bonds issued by state

[Chart 15.2] Number of impact municipal bonds issued by state

California continues to be the largest issuing state of impact municipal bonds in dollar terms, launching US$4.4 billion in H1 2022, 15% up from last year. It represents 22% of all US municipal impact bonds launched during the past six months. The largest issuance of the half-year was launched by the California Community Choice Financing Authority in the end of June at US$792 million.

In terms of the number of securities, New York remains the largest issuing state of the half-year despite a 20% drop in the number of securities issued. It issued 275 securities in H1 2022, with the largest issuance being a US$261-million climate bond launched by New York State Housing Financing Agency in the beginning of June.

[Chart 16.1] Use of proceeds of impact municipal bonds

The top use of proceeds among US municipal impact bonds in H1 2022 was single- and multi-family housing, which together took up 45% of total issuance in the first half of the year and involved US$8.9 billion of issuances. Mass and rapid transit followed as the second most popular use of proceeds, involving US$2 billion of impact bonds.

Index

[Chart 17.1] Total returns of impact bonds indices vs broad market index

[Chart 17.2] YTD (to 30th June 2022) changes in total returns of index constituents by bond type

[Chart 17.3] Duration of index constituents by bond type

As of 30 June 2022, ICE Green, Social and Sustainable Bond Index (SSAG) showed a total year-to-date return of -13.25% and ICE BofA Green Bond Index (GREN) showed a total return of -14.19%. Both indices have lower total returns than the ICE BofA Euro Broad Market Index (EMU0), which had total returns of -12.11%.

When breaking down the index constituents by bond types, the difference in total returns is particularly obvious among sovereign bonds. Sovereign bonds in SSAG and GREN have total returns of -20.13% and -20.72% respectively, compared with -12.25% of EMU0. Such difference could be attributed to the longer duration of sovereign bonds within SSAG (14.16 years) and GREN (14.45 years) in contrast with the broad market index (7.72 years).

EMU0 also has securitized/collateralized bonds within its constituents which had the best performance among all bond types. The impact bond indices, however, did not include such bonds as their constituents, which further magnified the gap in total returns against the broad market index.

It shows that the underperformance reflected by the impact bond indices was attributed to long duration of certain sovereign constituent bonds.

Greenium

[Chart 18.1] Yield Spread of Germany’s 5-year Green Federal Note vs its conventional twin

[Chart 18.2] Yield Spread of Germany’s 10-year Green Federal Bond vs its conventional twin

[Chart 18.3] Yield spread of Germany’s 30-year Federal Bond vs its conventional twin

The yield spread between Germany’s 5-year green note and its conventional twin had remained relatively steady over the first six months of 2022, ranging between 4.3 bps and 6.8 bps. It signals the continuous existence of greenium in the short-term government green bond.

However, the opposite was observed in green bonds of longer duration. The yield spread between Germany’s 10-year green bond and its non-green twin has narrowed significantly over the same period, shrinking from 5.8 bps in the beginning of 2022 to its lowest point of 0.7 bps around mid-June. Similar observations were found in Germany’s 30-year green bond pair, with yield spread declining from 3.7 bps in January to 0.9 bps in June.

It shows that greenium tends to diminish in bonds of longer maturity as yields rose towards the middle of the year.

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