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Impact Bond Analysis

Impact bond certification jumps amid regulatory scrutiny

Q3 2022

Published

November 2022

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

Regulatory Research Specialist

Executive Summary

Certification jumps amid regulatory scrutiny

The percentage of impact bonds certified by a third party hit 87% globally in Q1-Q3 2022 up from 84% last year, amid growing regulatory oversight fueled by concerns of ‘greenwashing’. While Europe, the Middle East and Africa (EMEA) still have the highest certification rate, certification jumped from 68% to 85% in the Americas, and from 83% to 87% in the Asia-Pacific region (APAC).

For the purposes of this report, the term “impact bonds” is defined 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.

Overall, global issuance of impact bonds slowed, with the year-to-date issuance falling 13% to US$559 billion in the first three quarters of 2022. However, signs of recovery were evident towards the end of Q3, with a record amount of impact bonds launched in September. The percentage of impact bonds against all general bond issuance also returned to 4.1% in September after sinking from 4.9% in January to 1.5% in August.

EMEA remains the largest issuing region of impact bonds, contributing more than half of global issuance despite issuing 17% less than last year. Nine out of the top ten deals in 2022 were issued by European entities, including the European Union and governments from Italy, France, Germany and Belgium.

APAC was the only region with a year-on-on year growth of 13%, driven by increased issuance from China and Japan. China remains the top issuing country for the year-to-date, even as issuance fell over the past three quarters. In China, green bond issuance has fallen 21% from Q2 to Q3 after the country tightened regulations for green bond issuers and certifiers, causing issuance in China to fall behind Germany for the first time this year. Nonetheless, the new rules are expected to boost the percentage of certified green bonds in the country, which stand at 79% in China compared to 97% in Germany in Q3.

A similar pattern was also seen in the US green bond issuance fell 37% from Q3 to Q4 last year when U.S. regulators began scrutinizing potential greenwashing. The percentage of certified bonds continued to rise thereafter, from 45% in Q3 2021 to 84% in Q3 2022. Total issuance, which had been declining since Q4 last year, also rebounded in Q3 2022.

Social bonds have retained the highest percentage of third-party certification, though issuance volumes fell 41% year on year. Issuance from EMEA almost halved after a surge of issuance amid the pandemic. By contrast, APAC has issued 28% more than last year, with rising interest in Japan and Korea.

Sustainability bond issuance dropped 23% year on year, with only 63% of issuance certified by a third party, the lowest among the three impact bond types. The low certification rate was attributed to supranational entities, who are major issuers of sustainability bonds but continued to self-declare a large portion of their issuance against the market trend.

In terms of performance, the ICE Sustainability Bond Index (SSTN) was also the only impact bond index that had better year-to-date return than the broader market index. This was partly due to its lower duration risk in an asset class where performance remains driven by interest rate movements and duration. For example, SSTN has 0.63 year less duration risk than the Euro Broad Market Index (EMU0) which helped it outperform EMU0 by 1.25% YTD in a rising rate environment.

When looking at impact bond issuance from corporates we’ve seen a 10% drop year on year, with the real estate/REITs sector issuing 70% less than last year amid a property debt crisis in China. A significant 90% drop was observed in Cayman Islands, where more than a dozen of Chinese property companies registered on the islands no longer offered impact bonds in 2022. Issuance from the real estate/REITs sector in the US also fell 55% year on year. The drop brought about by the real estate/REITs sector was balanced by growing issuance from the financial sector, which took up almost half of all corporate issuances this year and has issued 8% more than last year. Within the financial sector EMEA had the highest total issuance while the top deals so far this year were launched by US banks Citigroup and Wells Fargo.

Issuance

Global Issuance

[Chart 1.1] Dollar amount of impact bonds issued globally

[Chart 1.2] Number of impact bonds issued globally

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

[Chart 2.2] Number of impact bonds issued globally by month

Global issuance of impact bonds edged up 1% from the previous quarter to US$188 billion in Q3 2022, becoming the quarter of the highest issuance so far this year. Issuance remained low in the beginning of Q3 but rebounded in September as issuance more than doubled from that of the previous month. Four impact bonds worth €5 billion or above were launched in September alone.

However, total issuance in 2022 was still lower than that of last year. A total of US$559 billion of impact bonds were launched between Q1 and Q3 2022, 13% down from same period in 2021.

Meanwhile, the percentage of certified impact bonds has improved from 84% Q1-Q3 2021 to 87% Q1-Q3 2022.

Issuance by Location

[Chart 3.1] Dollar amount of impact bonds issued by region

*The category of ‘Other’ includes supranational agencies with members from two or more regions.

[Chart 3.2] Number of impact bonds issued by region

*The category of ‘Other’ includes supranational agencies with members from two or more regions.

EMEA remained the largest issuing region by dollar amount with the highest percentage of certified bonds. A total of US$286 billion of impact bonds were launched by EMEA entities between Q1 and Q3 2022, of which 95% were certified by a third party. Issuance from EMEA alone took up 56% of global issuance. Nine of the top ten bonds by dollar terms in 2022 were issued by European entities.

APAC followed as the second largest issuing region by dollar amount, launching US$173 billion of impact bonds between Q1 and Q3 2022. It was also the only region showing a year-on-year growth. Dollar amount of issuance in APAC between Q1 and Q3 2022 increased 13% from same period last year, supported by rising issuance from China and Japan. Issuance in EMEA and the Americas (AMER) both fell 31% and 17% respectively. However, the percentage of certified bonds in APAC is still less than EMEA, albeit an increase from 83% in 2021 to 87% in 2022.

Notably, the percentage of certified impact bonds in AMER has increased significantly from 68% to 85% this year amid regulatory actions1 against greenwashing in the United States.

[Chart 4] Percentage of impact bond vs general bond issuance

*The category of ‘Other’ includes supranational agencies with members from two or more regions.

The percentage of impact bonds versus all bond issuance had been falling over the year but showed signs of recovery in September. The percentage of impact bonds vs all bond issuance started at 4.9% in January and fell to just 1.5% in August, before rebounding to 4.1% in September. Relative issuances from EMEA, APAC and global supranational entities have all increased during September 2022.

[Chart 5.1] Top 5 jurisdictions by dollar amount of impact bonds issued between Q1 and Q3 2022

[Chart 5.2] Top 5 jurisdictions by number of impact bonds issued between Q1 and Q3 2022

China remains the largest issuing country of impact bonds by dollar amount between Q1 and Q3 2022, launching a total of US$81 billion over the three quarters, 63% up year on year. It is followed by Germany, which issued US$67 billion and 23% more than last year. France is third after launching 26% less year on year, issuing a total of US$57 billion over the three quarters.

However, looking at the single quarter, China’s issuance was behind Germany for the first time this year in Q3. Chinese entities issued US$23 billion in Q3 2022, compared with US$28 billion from Germany, supported by a €5 billion sovereign green bond and a €4 billion green bond issued by state-owned bank Kreditanstalt Fur Wiederaufbau (KfW).

Suparanational entities also issued a large amount of impact bonds despite a 34% drop from last year, launching US$76 billion over the first three quarters.

Issuance by Bond Type

[Chart 6.1] Dollar amount of impact bonds issued globally by bond type

[Chart 6.2] Number of impact bonds issued globally by bond type

Green bonds continue to be the most popular impact bond type, comprising 63% of total issuances in Q1-Q3 2022 globally. A total of US$350 billion worth of green bonds were launched over the first three quarters, rising 4% year on year supported by growing issuance from China and Germany. A decrease in the number of securities issued globally also implies a larger value size of green bond issuance on average. Two of the three €6 billion impact bonds issued this year have been green bonds, issued by Italy and the European Union.

In contrast, issuance of social bonds and sustainability bonds has fallen 41% and 23% year on year. US$90 billion of social bonds were launched in Q1-Q3 2022, taking up 16% of all issuances. US$ 117 billion of sustainability bonds were launched over the same period, representing 21% of total issuances.

[Chart 7.1] Top 5 jurisdictions by dollar amount of green bonds issued in Q1-Q3 2022

[Chart 7.2] Top 5 jurisdictions by number of green bonds issued in Q1-Q3 2022

China remained the largest issuing country of green bonds in 2022, launching US$74 billion of green bonds over the first three quarters. Germany followed and launched US$59 billion of green bonds during the same period.

Despite a year-on-year growth, Chinese issuance has been decreasing quarter on quarter since Q2 2022. China launched only US$20 billion of green bonds in Q3, 21% down from the previous quarter in 2022. Meanwhile, Germany launched US$27 billion in Q3, 66% more than Q2 2022. It is the first time that China has fallen behind Germany this year in terms of a single quarter’s green bond issuance.

Issuance in China declined as the regulator published the new China Green Bond Principles2 in July 2022 which require 100% of proceeds from the bonds issued to be spent on green projects (as such term is defined in such regulations). Previously, this spending threshold was 70% for exchange-traded corporate bonds and 50% for state-owned enterprise bonds. In September this year, the regulator further published a list of 18 registered green bond certifiers3 who will need to conduct self-assessment annually on their green bond evaluation and certification business and submit a written report to the Green Bond Standard Committee before the end of March each year. Issuance of certified green bonds dropped 25% immediately in Q3, with the amount of issuer declared green bonds remain almost static. While the new rule may have temporarily decreased issuance in the country, tighter standards are generally expected to boost investor confidence in the long run, as observed in the U.S. market (as described in more detail below).

In the US, green bond issuance reached US$15 billion in Q3 2021, but only 45% of the bonds were certified by a third party. As regulators started to crackdown on greenwashing in the financial sector4, the amount of non-certified green bonds fell 68% in the following quarter, bringing total issuance down by 37% and the percentage of certified bonds up to 72%. Issuance dropped further to US$4 billion in Q2 2022, while the percentage of certified bonds continued to rise to 78%. In Q3 2022, growth was seen in both quantity and certification, with its issuance rebounding to US$12 billion and the percentage of certified bonds reaching 84%. While the US certification ratio is still less than its European peers, it demonstrates the process of transitioning from a high quantity, low third-party certified market to a high quantity, high third-party certified market.

[Chart 8.1] Top 5 jurisdictions by dollar amount of social bonds issued in Q1-Q3 2022

[Chart 8.2] Top 5 jurisdictions by number of social bonds issued in Q1-Q3 2022

France remained as the largest issuing country of social bonds in Q1-Q3 2022 by dollar amount despite a 40% drop in issuance from the same period in 2021, launching a total of US$29 billion over the three quarters. The largest social bond so far this year was a €6-billion security launched by French government agency Caisse La Caisse d'Amortissement de la Dette Sociale (CADES).

Korea and Japan followed, issuing US$17 billion and US$9 billion of social bonds respectively over the same period. Issuance in Korea has grown 34% year on year while that in Japan increased 67%.

Social bond issuance in EMEA has generally returned to the pre-pandemic proportion of impact bonds issued (by value) after a period of heightened popularity in 2020 and early 2021 at the height of the pandemic. Issuance in the region jumped from US$2 billion in Q1 2020 to US$61 billion in Q1 2021, but has now receded to US$17 billion in Q3 2022. Meanwhile, issuance in APAC has been rising relatively steadily from US$3 billion in Q1 2020 to US$12 billion in Q3 2022, driven by growing issuance from Japan and Korea.

[Chart 9.1] Top 5 jurisdictions by dollar amount of sustainability bonds issued in Q1-Q3 2022

[Chart 9.2] Top 5 jurisdictions by number of sustainability bonds issued in Q1-Q3 2022

Supranational agencies continued to be the major issuer of sustainability bonds despite a 20% year-on-year drop. Such entities launched US$44 billion of sustainability bonds in Q1-Q3 2022, representing 37% of global issuance of the bond type.

Supranational entities continue to self-certify for a large portion of their sustainability bonds, going against the broader trend of seeking third-party certification in the market. Among all sustainability bonds issued by supranational entities in Q1-Q3 2022, only 8% were certified by a third party. The largest sustainability bond issuances so far this year were two US$4 billion securities issued by the European Investment Bank and the International Bank for Reconstruction and Development, both of which were not certified by a third party.

Meanwhile, the US is the largest single issuing country of sustainability bonds (by value) so far in 2022, launching US$12 billion of securities over the three quarters. The percentage of certified bonds stood at 90% during the first three quarters of 2022.

Issuance by Issuer Type

[Chart 10.1] Dollar amount of impact bonds issued globally by issuer type

[Chart 10.2] Number of impact bonds issued by issuer type

*The category of ‘Other’ includes supranational agencies with members from two or more regions.

Both corporates and governments have issued fewer impact bonds by dollar amount in Q1-Q3 2022 compared to same period last year.

Corporates issued US$273 billion worth of impact bonds in Q1-Q3 2022, 10% less than same period last year. The fall was attributed to declining issuance from AMER and APAC. Corporate issuances in AMER have dropped 32%, driven by a 70% decrease in issuances from real estate/REIT sector and a 33% drop from the utility sector. Issuance from the financial sector, however, edged up 1% year on year, with the largest corporate bonds of Q1-Q3 2022 coming from American banks. For example, Citigroup issued a $2 billion social bond in Q1 while Wells Fargo & Company launched a $2 billion sustainability bond in Q3.

In APAC, corporate issuances have dropped 8%, with the industrial sector and consumer discretionary sector issuing 48% and 15% less than Q1-Q3 last year.

EMEA was the only region where corporate issuances have remained static year on year, with a 30% drop of issuance from the real estate/REIT sector offset by an 8% growth from the financial sector and a 29% growth from the utility sector.

Globally, governments launched US$286 billion over the three quarters in 2022, 16% down from same period last year. APAC was the only region showing a growth of 32% in government issuances year on year, with at least 16 bonds worth US$1 billion or above from the governments of China, Hong Kong, Singapore, Indonesia, Philippines and Korea, as well as the Asian Infrastructure Investment Bank.

Governments in EMEA have issued 31% less than last year, with the three largest issuing jurisdictions in the region launching 32% less than last year. Nonetheless, the largest bonds of the year still came from Europe, involving three €6 billion deals from Italy, France and the European Union.

Governments in AMER issued 28% less year on year whereas non-regional supranational agencies issued 30% less than the same period in 2021.

[Chart 11.1] Dollar amount of impact bonds issued by corporates globally

[Chart 11.2] Number of impact bonds issued by corporates globally

The financial sector continued to be the largest issuing sector of corporate impact bonds, representing 49% of all corporate issuances this year. A total of US$135 billion has been issued by the sector in Q1-Q3 2022, marking an 8% growth year on year. Rising issuances were observed in financial sectors across all regions.

In contrast, issuances from the real estate/REIT sector have fallen behind that of the utility sector this year. The real estate/REIT sector launched US$28 billion Q1-Q3 this year, 47% down from last year. The fall was driven by shrinking issuances from the US and Cayman Islands.

Issuances from the US’s real estate/REIT sector went down 55% year on year to US$4billion this year, while that from the Cayman Islands fell 90% to only US$0.9 billion. Last year, all real estate issuers from the Cayman Islands had a country of risk in either China or Hong Kong. Amid a property debt crisis in China5, the issuance amount from Cayman Islands had dropped significantly this year, leaving only two issuances having a country of risk in Hong Kong and the UAE. Meanwhile, issuances from real estate companies incorporated in China returned in 2022 with US$1 billion of impact bond launched over the first three quarters, after three years of no issuance from the country’s sector.

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

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

Although corporates continue to dominate green bond issuance and took up 59% of all green bond issuance over the first three quarters in 2022, governments have also been increasing their green bond issuances. Governments and government agencies have issued US$144 billion of green bonds in Q1-Q3 2022, 17% higher than same period last year.

However, for social bonds and sustainability bonds, governments and government agencies continue to be the major issuer over corporates, taking up 74% of all social bond issuance and 64% of all sustainability bond issuance in Q1-Q3 2022.

US Municipal Issuance

[Chart 14.1] Dollar amount of impact municipal bonds issued in the United States

[Chart 14.2] Number of impact municipal bonds issued in the United States

US municipalities issued US$32 billion of impact bonds in Q1-Q3 2022, showing a 16% growth year on year. Issuance amount dived in Q1 2022 following a record quarter in Q4 2021, but later recovered in Q2 and Q3 this year. In terms of quantity, US municipalities have launched 3,510 impact bonds over the first three quarters of 2022, compared with 4,006 bonds in the same period last year.

[Chart 15.1] Top 5 US states by dollar amount of US municipal impact bonds issued

[Chart 15.2] Top 5 US states by number of US municipal impact bonds issued

California continues to be the largest issuing state of municipal impact bonds in dollar terms, launching US$6.6 billion in Q1-Q3 2022, 5% down from last year. It represents 21% of all US municipal impact bonds launched during the first three quarters. The largest issuance of the first three quarters was a US$1 billion green bond issued by the California Community Choice Financing Authority in September.

In terms of the number of bonds, New York remains the largest issuing state in the first three quarters despite a 26% drop in the number of bonds issued. New York issued 380 securities in Q1-Q3 2022, with the New York City Housing Development Corporation issuing the most over the three quarters.

[Chart 16] Use of proceeds of US municipal impact bonds

The largest application of proceeds among US municipal impact bonds in Q1-Q3 2022 was to single- and multi-family housing, which together took up 38% of total issuance in the first three quarters of the year and involved a total of US$12 billion of issuances. General purpose/public improvement followed as the second largest application of proceeds, involving US$4 billion of impact bonds.

Index

[Chart 18.1] ICE impact bond indices: SSAG, GREN, SOCI, SSTN, SLBI

[Chart 18.2] ICE impact bond indices VS broader market index (EMU0)

The total return value of the ICE Green, Social & Sustainable Bond Index (SSAG) decreased by 17% since the beginning of the year from 109.8 to 90.9, which is a greater drop than the broader market as reflected by a 16% drop in the ICE BofA Euro Broad Market Index (EMU0).

Among the three types of bonds, only the ICE Sustainable Bond Index (SSTN) performed slightly better than the broader market index, decreasing only 15% between Q1 and Q3 this year. Both the ICE BofA Green Bond Index (GREN) and ICE Social Bond Index (SOCI) fell 18% over the three quarters.

The ICE Sustainability-Linked Bond Index (SLBI) fell 21% between Q1 and Q3 this year. This was partly due to its lower duration risk in an asset class where performance remains driven by interest rate movements and duration. Both ICE BofA Green Bond Index (GREN) and ICE Social Bond Index (SOCI) fell 18% over the three quarters.

Greenium

[Chart 19.1] Yield Spread of Germany’s 5-year Green Federal Note vs its conventional twin

[Chart 19.2] Yield Spread of Germany’s 10-year Green Federal Bond vs its conventional twin

[Chart 19.3] Yield spread of Germany’s 30-year Federal Bond vs its conventional twin

The yield spread (“Greenium”) between Germany’s 5-year green note and its conventional twin moved relatively steadily between 4.3 and 6.8 bps in the first half of year, but has started to fluctuate in Q3. Yield spread has spiked to 7.9 in mid-August and 7.7 in the end of September.

While greenium still exists in Germany’s 5-year green issuance, it began disappearing in the 10-year green bond. The yield of Germany’s 10-year green federal bond first became higher than that of its conventional twin in early July, and then again in late September with the green bond’s yield becoming 1.1bps higher than that of the non-green bond.

With greenium fluctuating in the 5-year issuance and occasionally vanishing in the 10-year issuance, greenium has been shrinking relative steadily in the 30-year issuance. The yield spread between Germany’s 30-year federal bond and its green equivalence has been decreasing gradually from 3.7bps in the beginning of the year to 0.9bps in the end of Q3.

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