During the summer, short-term challenges to the energy transition kept mounting, with Europe’s energy crisis becoming even more acute after Russia suspended 90 percent of its supply of natural gas. A painful adjustment of energy consumption is now necessary over the coming winter and to limit this adjustment, European governments will use coal-fired power plants and substitute gas for oil where possible. This crisis is also being amplified by damage caused by the climate crisis itself – extreme droughts. Such climate shocks have very real economic effects that could further hamper the transition by reducing the capital available for scaling new infrastructure. However, these crises will also serve as catalysts for long-term solutions.
“While all of this suggests that the transition to a zero-emission economy will be held up in 2022, we still expect a major acceleration in transition investment to kick off in 2023. The emphasis will be on renewable energy, which is the cheapest alternative,” says Thomas Thygesen, Head of Research, Climate & Sustainable Finance, at SEB. “This accelerated transition reduces the risk of future energy shortages and climate risks but also comes with significant challenges in the shape of obsolete assets, resource requirements and capital needs, which we explore further in this issue of The Green Bond.”
The market for sustainability-themed bonds and loans continues to lag last year’s record. Between January and the end of August, total transactions stood at USD 946 billion, down 11 percent compared with the same period last year. This decline continues to affect almost all product categories, with social bonds and sustainability-linked loans down the most in terms of nominal value.
“Nevertheless, there are initial signs that the market is recovering,” says Gregor Vulturius, Advisor at Climate & Sustainable Finance at SEB. “Green bonds and sustainability-linked bonds continue to outperform last year’s result, with new issuances ahead by 5 percent for each category. Furthermore, August marked the first time since April that new issuances exceeded those of the same month last year. Based on this, we believe that 2022 will only be slightly behind last year’s results.”
In the report, SEB's experts also discuss the emergent pushback against ESG investing, which has gathered momentum over the summer with a political backlash in some US states. While investors should in principle be free to use any input they want in the investment process, the debate does highlight the need for more realistic assumptions. In particular, equity strategies restricting portfolio outcomes based on ESG scores or emission levels should not be expected to match market returns. The report also contains an update regarding the divergence in the performance of green bonds versus other bonds, showing that green corporate bonds have so far this year outperformed their counterpart.
About The Green Bond report
SEB, which together with the World Bank developed the green bond concept in 2007/2008, publishes the research publication The Green Bond 5-6 times a year. It strives to bring readers the latest insight into the world of sustainable finance through various themes. Even though the report covers all kinds of products and developments in the sustainable finance market, we have decided to keep its historic name – The Green Bond – as a tribute to our role as a pioneer of the green bond market. You can find The Green Bond report at www.sebgroup.com and here.