Responsible investment

Green bonds market expected to top the $1trn mark in 2021

Despite the year’s myriad of challenges, 2020 represented a huge step forward for the green bond market. There were a record number of issuances, following the launch of various sovereign bonds – and a wide diversification of issuers. Green bonds represent a very appropriate tool to channel investments towards transition funding needs, and we believe 2021 will be another record year for the market which is likely to reach $1trn.

Below, we outline why and where we see this growth emerging, as well as examining green bonds’ carbon footprint and social benefits.

Expansion and diversification of green issuance

Many governments have committed to a net-zero carbon pledge, and many more should follow. In total, 26 countries now, or are about to, have a net-zero carbon pledge set in law and many others are currently discussing potential targets. However, only 11 governments have already launched sovereign green bonds. We expect this figure to grow as an increasing number of countries are due to put their words and commitment into action and investments, which are likely to be financed through green bonds. Even though many nations are still working on defining targets and how to reach them, there is strong momentum in terms of sovereign bonds financing environmental projects. Following issuances from Germany, Hungary, Sweden and the Netherlands during 2020, Italy, Spain and the UK have all pledged to issue green bonds this year - and certainly many others are likely to follow.

On the credit side, we have seen that once a new issuer joins the market, it paves the way for others to follow. This is really encouraging for sectors such as automotive, telecommunications or real estate, which have huge potential for further green issuances given that the potential number of peers to follow remains large. In addition, existing issuers currently represent a larger share in terms of market value than in terms of number. The number of issuers in the European automotive sector may represent only 16% of all issuers but their market value is close to 50% of the sector.[1]

As a result, these issuers tend to come to the market more frequently, or with a larger issuance amount, which should provide additional support. If some sectors are still difficult to imagine in the green bond market, we believe there should be a progressive rebalancing from utilities towards industrial sectors, as the recent dynamic of new sectors joining the market, in our view, is just the beginning.

This level of diversification we have identified in the market is also reflected within the projects financed by green bonds themselves. These projects are progressively moving away from renewable energy towards other ways of reducing energy consumption, such as clean transport and the development of green buildings.

Regional rebalancing of the market

In Europe, even if the region is already ahead of the curve in terms of issuances, the market is likely to continue to grow given 30% of the European Union’s Recovery fund will be dedicated to the energy transition for example.

On the other side of the Atlantic, the green share of the US dollar credit market barely reaches 1% compared to the euro credit market where it represents 5%.[.2] This is somewhat underwhelming when we know that the dollar credit market is around three times the size of its euro counterpart.[3] However, it does emphasise, once again, the huge potential of the US dollar green bonds market, especially following Joe Biden’s US Presidential Election win[4], who has committed to a $2trn energy transition investment plan and to bring the US back into the Paris Agreement.

Green issuances can cut a company’s carbon footprint 

The issuances of green bonds continue to prove their benefits in terms of environmental impact, with the carbon footprint being on average half that of an equivalent conventional bond.

Around 90% of green bond projects aim to either reduce energy consumption or increase clean energy production, which is why we generally focus on carbon emissions when assessing a green bond. Two key elements are often considered - the carbon induced by the projects and the carbon emissions avoided i.e. the difference between carbon induced by standard activity versus carbon induced by green projects. This allows us to assess the share of reduction enabled by a green bond compared to a conventional bond.[5] This would mean that in the long term corporates issuing credible green bonds would have, on average, their carbon footprint cut by half.

Green bonds and the social benefit

The impact of green bonds goes even further than the environmental benefit. Our internal United Nations Sustainable Development Goals (SDG) mapping tool has shown that around 25% of green bond investments contribute to a social benefit – mainly SDG3, Good Health and Well-Being, and SDG8, Decent Work and Economic Growth – with 75% associated with environmental SDGs. As an example, investing in renewable energy will contribute to producing clean energy, which will help lower pollution, therefore supporting global health.

AXA IM’s internal framework maps every green and social project against the 169 underlying targets of the 17 SDGs. This enabled us to determine the contribution of every green bond we cover to every SDG.

[1] Source: Ice Bank of America ML Euro Corporate Index (ER00) with a classification ML level 3

[2] Source: AXA IM, Bloomberg - November 2020

[3] Source: AXA IM, Bloomberg - November 2020


[5] Source: AXA IM, KPIs (Carbon emission, tCO2 avoided and Cars removed) are calculated based on a 76% coverage of the Ice BofAML Green Bond index.

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