EM green, sustainability bonds face ongoing | Australian Markets

Emerging market (EM) inexperienced, social, sustainability, and sustainability-linked (GSSS) bond gross sales face an ongoing growth hunch, as softening international financial growth, regulatory modifications in Europe, and more and more downcast sentiment on ESG, problem prospects for this rising asset class, in response to Europe’s largest asset management firm Amundi.

Between 2018 and 2024, rising market GSSS bond issuance has contributed round one-sixth of the cumulative international GSSS bond market, which totals $5.1 trillion.

While international GSSS bond issuance accelerated in 2024, hitting an all-time high of more than $1 trillion on a gross foundation (up 3% yr over yr), EM inexperienced bonds fared significantly worse, with issuance falling 14% yr over yr.

Amundi attributed a lot of the decline to inexperienced tech power-player China, one of the important thing markets for GSSS bonds, the place native debtors made a shift to standard bonds within the onshore market.

Another issue behind the market retreat was a 23% contraction in general fixed income issuance in rising markets outdoors China, amid weaker financial growth in Asia and Europe.

Despite this, GSSS bond penetration amounted to more than 5% in rising markets outdoors China – a new report – and forward of the charges seen in China and in developed markets.

On pricing, inexperienced premium or “greenium” (a yield low cost for issuers of GSSS bonds) more than halved to an estimated 1.2 foundation factors in 2024 from 2.5 bp in 2023, Amundi calculates.

For rising markets, in the meantime, the greenium successfully disappeared in 2024 as provide caught up with demand for this sort of asset.

Looking longer-term, nevertheless, Amundi takes a more constructive view on GSSS EM bonds’ growth prospects.

“Annual investments in clean energy that deliver greater efficiency, and supply security are likely to double in the coming years.”

“This growth will likely be supported by an increasingly competitive renewable energy sector and ambitious commitments by multilateral institutions.”

Citing projected figures from the S&P, Amundi notes that rising markets are estimated to see round $5 trillion in clean vitality investments.

This contains the development of 5,800 GW of clean vitality tasks, made up overwhelmingly of photo voltaic photovoltaics and wind property, which signify about 60% and 30%, respectively.

Noting the dominance of supplies and manufacturing sectors in EM economies, Amundi foresees vital alternatives to strike clean vitality offers.

Indeed, a key driver of the growth in EM GSSS bonds, which have elevated from simply over $600 billion in 2020 to more than $1.04 trillion in 2024, has been the transition from carbon-based energy era to cleaner various vitality varieties.

Clean vitality investments in rising markets have surged over 70% since 2018, with China alone experiencing a 170% increase, Amundi famous.

As effectively, investor urge for food has grown markedly, with sustainable funds hitting $3.6 trillion of property beneath management in 2024, up from $1.4 trillion in 2018. Fixed income allocations within investment portfolios have risen to 22% on this time.

Yerlan Syzdykov, international head of rising markets at Amundi recognised a decisive shift within GSSS bonds, with inexperienced bonds – which have long dominated the GSSS EM bond market – giving method to sustainability bonds.

“This trend is pronounced among multilateral institutions and, more generally, among issuers outside China that are seeking the flexibility of sustainability bonds to finance both environmental and social projects,” Syzdykov wrote.