In the latest issue of SEB’s The Green Bond report, our experts highlight both the rising economic cost of the climate crisis and the mounting evidence of a faster transition to a clean energy system. On the debt side, green bonds are an island of growth in a sustainable finance market under pressure.
“The summer of 2023 was the warmest on record, highlighting the rising cost of the climate crisis, and there is a real risk that we have underestimated the economic loss from even a modest increase in temperatures,” says Thomas Thygesen, Head of Strategy and Equities and a transition specialist in SEB Sustainable Banking. “This means the cost of not accelerating the clean energy transition is also higher. Fortunately, we are seeing more and more evidence supporting our optimistic view that the transition is turning exponential – but we still need much more capital”.
For sustainable equity strategies, this is likely to lead to a new role for ESG (Environmental, Social and Governance). According to Thomas Thygesen, ESG is likely to become less important as a portfolio objective as hard company data start to allow a more direct focus on climate risks. However, it will become more important as an input into the analysis of risks at the company level if the economic cost off the climate crisis is higher, he says.
The report also features an update on the sustainable finance market. Bonds with proceeds earmarked for sustainable projects continue to grow, with cumulative issuances of green bonds reaching USD 408 billion YTD in 2023. The strengthening of sustainable fixed income can also be seen in increasing premiums that investors are willing to pay for labelled bonds. However, the continued decline in sustainable-linked bond and loan financing is responsible for the overall 20 per cent drop in sustainable borrowing in 2023.
“A lack of credibility and transparency remain key main challenges for performance-based borrowing as many issuers of sustainability-linked bonds struggle to meet their targets,” says Gregor Vulturius, Lead Scientist and Advisor at Climate & Sustainable Finance at SEB. “Adhering to best practice guidance on target setting and impact reporting and a need for refinancing are necessary for achieving growth in sustainability-linked lending in the coming years.”
This edition of the report introduces a new regular section: the Sustainable Finance Regulatory Update, curated by the Head of Sustainability Strategy and Policy at SEB and Member of the EU Sustainable Finance Platform, Karl-Oskar Olming. The first installment of the regulatory update summarizes the new mandate of the Platform and reviews recent changes and clarification regarding the EU Taxonomy, SFDR, transition finance, ESG ratings and new sustainability reporting standards.
The report also touches upon the topics of carbon removals, water, and biodiversity, with Storebrand introducing a new investor initiative to protect nature, and SEB experts discussing the importance of carbon removals for reaching corporate net-zero targets and the bank’s expectations around investments in water utilities.
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 sebgroup.com and here.