Since the latest issue of The Green Bond in April, the conclusions made regarding the impact of the war in Ukraine and the current energy crisis have been strengthened. This applies both to the negative short-term consequences – with a considerably higher level of coal consumption than expected – and to the long-term effects we foresee in the shape of a faster-than-expected transition to renewable energy. The reason for this acceleration is that the longer the war continues, the less acceptable dependency on energy supplies from Russia is likely to become, and because the high prices for fossil energy will continue to strengthen the argument to deploy renewables instead.
“While there are plenty of concerns ahead, SEB’s experts still believe that the energy crisis we now experience will act as a catalyst for a long-term acceleration of the transition to a sustainable energy system,” says Thomas Thygesen, Head of Research, Climate & Sustainable Finance, at SEB. “While the surge in investment we expected from the start of 2022 is likely to be delayed as governments and companies are forced to focus on fixing short-term problems before they turn their attention to longer-term solutions, SEB’s experts still expect the total annual global investment in transition, including renewable energy, to reach USD 1 trillion* next year and double twice more before the end of the decade.”
After a drop in new transactions in the first quarter of this year, the global market for sustainable debt has remained lackluster in the second quarter. In April and May, a total of USD 156.6 billion of new sustainability-themed bonds were issued, compared with USD 176.7 billion in the same period in 2021. During the first five months of the year, total issuance of sustainability-themed bonds is down 12 percent, which is disappointing but should be seen in the context of a 23 percent decline in total US corporate bond issuance in the same period. There are also pockets of strength, mainly in green and sustainability-linked bonds, where issuance has increased by 7 percent and 37 percent, respectively. Demand for funding is likely to pick up strongly towards the end of the year as immediate shortages have been addressed.
In the report, we also look at how recent outflows from ESG-labelled funds could be a signal that sustainability-oriented investors – for a number of different reasons – are increasingly starting to develop a preference for measurable impact, rather than ESG ratings, to guide their investment strategies. While ESG funds are likely to remain popular with value-based investors, meaning that such a development will not lead to any big outflows, we believe it could result in new inflows being concentrated elsewhere. The relative success of green bonds, where the use-of-proceeds principle provides a clear link from asset to impact, adds some support to this conclusion.
“An increased focus on impact combined with economic and geopolitical arguments that now clearly favour renewables should lead to a major acceleration in investments and funding for the global energy transition,” says Gregor Vulturius, Advisor at Climate & Sustainable Finance at SEB. “SEB’s experts think this will lead to stronger demand for quantifiable impact from investors.”
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.
*In an earlier version of this release, the forecast for the total annual global investment in transition was incorrect. It has now been corrected.