Demand for emerging market green bonds surges

According to an Amundi and IFC forecasts continued growth in issuance after doubling to nearly one hundred billion dollars last year

Demand for emerging market green bonds surges

According to a new report by Amundi and IFC, green bond issuance in emerging markets (EMs) and developing nations more than doubled in 2021 to a record US$95 billion, up from US$41 billion the previous year.

The Emerging Market Green Bonds study this year indicated increased demand from domestic and foreign investors, as well as increased issuance by new and current issuers, reported ESG Clarity.

The Amundi and IFC analysis highlighted seven new entries among the 35 issuers in these markets: Bangladesh, Côte d'Ivoire, the Dominican Republic, Guatemala, Pakistan, Serbia, and the Slovak Republic.

The largest issuer was China, which accounted for about two-thirds of the total.

In 2021, an additional US$64 billion in social, sustainability, and sustainability-linked bonds (SLBs) were issued, bringing the total EM issuance of these bonds to US$159 billion, roughly quadruple the amount issued in 2020.

“Green bonds and other nascent financial instruments earmarked for social and sustainability projects are becoming an increasingly significant source of funding for many emerging economies,” said Susan Lund, vice-president, economics and private sector development at IFC.

Last year’s report predicted the market would hit US$100bn by 2023. This year’s forecast is more optimistic: “annual issuance in EM green bonds could rise to $150bn by 2023, with Chinese issuers potentially contributing more than half the total,” said Yerlan Syzdykov, global head of EM at Amundi.

Although rising interest rates impacted total returns in the global green bond market, EM green bonds still outperformed the broader EM bond index by 77 basis points in 2021, according to the analysis.

Secondary market data suggest the average "green premium" for EM issuers is around 3.4 basis points.

China continued to be the largest issuer of green bonds in this group. Non-financial corporate issuers overtook financial institutions for the first time, with issuance totaling U.S $59 billion, or 63% of the total.

The next biggest countries on the list were India, Chile, the Czech Republic, Poland, and Brazil.

Lund added that, “The momentum of issuance rebounded very strongly after a difficult year in 2020 and investor interest, both domestic and international, remains strong.”

Given the significant investment required for EM to reach development targets and transition to low-carbon economies, the outlook is positive.

However, existing inflation pressures and supply chain bottlenecks caused by the Ukraine conflict may present obstacles in the future.

The earnings from green bonds are usually allocated to specific initiatives that help to achieve environmental goals.

According to the analysis, renewable energy will receive the largest portion of profits from EM green bonds in 2021, accounting for 45% of the total.

Other forms of bonds issued in EM and developing economies with proceeds intended for specific social and sustainability projects, as well as SLBs, have experienced increased issuance and investor interest.