Moody's: Following a record year, green bond issuance is set to eclipse $250 billion in 2018

Moody's Investors Service projects global green bond issuance to grow by around 60% in 2018 and eclipse a total of $250 billion, according to the rating agency's latest assessment of the green bond market. Such growth would far exceed the record $155 billion of green bonds issued in 2017, and can be attributed to several emerging trends.

"Developed market corporates and banks will remain active issuers," according to Matt Kuchtyak, an analyst at Moody's and the lead author of the report. "Emerging market issuers, sovereigns, municipals and green securitizations will also provide important engines of growth."

Moody's expects sectors that have traditionally played a large role in green bond issuance growth to maintain those roles in 2018. For example, financial and nonfinancial corporates, which represented 36% of total green bond issuance in 2017, will continue to be significant green bond issuers.

 

Organic market growth will result from greater awareness among issuers and other market participants of the potential benefits of green bond issuance, including investor diversification and demonstrating a commitment to sustainability. New players in the market such as emerging market issuers, sovereigns and municipalities should see significant growth in green bond issuance in 2018, according to the report.

Following a breakout year in sovereign green bond issuance, Moody's expects additional momentum in sovereign green bond transactions in the year ahead, including potential financings from the governments of Indonesia (Baa3 positive) and Belgium (Aa3 stable). In addition to promoting sustainability policies, green bond issuance provides a strong signal of a government's commitment to carbon emission reduction under the Paris Agreement. Some sovereigns, particularly in emerging markets, such as Nigeria (B2 stable; GB1) may also look to green bonds as an attractive means to finance large-scale climate adaptation investments.

While challenges remain for emerging market green bond financings, Moody's sees strong prospects for growth in issuance. Aggregate growth will be supported primarily by China and India, as well as other economies with governments implementing green finance policies. Multilateral agencies will also play a pivotal role in supporting the development of emerging market green bonds.

Moody's also projects municipal green bond issuance, in both the US and abroad, to hit record heights in 2018.

"The public sector is at the forefront of combating climate change, coping with environmental shocks and addressing critical infrastructure needs," says Kuchtyak. "We anticipate green bonds will increasingly serve as a relevant financing tool for these obligations."

On the demand side, Moody's expects that institutional investors will continue to seek to integrate sustainability into their asset allocation and risk management practices. Reflecting the broader trend toward sustainable investing, the combined assets of dedicated green bond funds reached close to $2 billion in the third quarter of 2017, up from just $500 million in November 2015.

According to the report, the lack of a universally-applied global green bond standard does not pose material challenges for green bond market growth. 2017 saw a marked proliferation in green bond standards and taxonomies, a trend Moody's expects to continue in 2018 as regulatory bodies across the globe influence market development and practices.

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