The sustainable bond market has become a key funding source for Sovereign, Supranational and Agency (SSA) issuers seeking to support their countries’ economies amid the pandemic as well as finance their decarbonisation commitments agreed at COP26.
Financing net-zero
Not only have an increasing number of SSAs tapped the sustainable bond market, investor appetite has been unwavered throughout the year, and will likely maintain through 2022, as reflected by the oversubscription of SSA sustainable bonds brought to market throughout 2021.
The increasing appetite for this market not only demonstrates the importance of the financial industry to support sustainable finance but its role in driving transparency and encouraging best practice within the industry. With the challenges from Covid-19 and our necessary transition to a low carbon economy, mainstreaming sustainability in the SSA market is integral to ensure a smooth transition towards net-zero.
Jamie Stirling, Global Head of Sovereigns, Supranationals and Agencies Debt Capital Markets at BNP Paribas, explains: “ESG issuance has been a cornerstone of the SSA market for several years now but there are still many sovereign issuers yet to access the market. Consequently we expect to see more inaugural ESG sovereign frameworks and bonds launched in 2022, with their issuance complemented by additional waves of funding from the earlier adopters.”
We expect to see more inaugural ESG sovereign frameworks and bonds launched in 2022.
Jamie Stirling, Global Head of Sovereigns, Supranationals and Agencies Debt Capital Markets
EU sets the pace
The European Union set the pace in 2020 with the first Covid-19 response bond through its €100 billion Support to mitigate Unemployment Risks in an Emergency (SURE) programme, followed by its inaugural NextGenerationEU bond issued in June 2021 to support a green, digital and responsible recovery. With a final size of €20 billion, the inaugural NextGenerationEU 10-year bond was the largest-ever institutional bond issuance in Europe, the largest-ever institutional single tranche transaction and the largest amount the EU has raised in a single transaction.
“In the year of the eagerly awaited COP 26, the high volume of transactions from new Sovereign issuers demonstrates that governments see Sustainable Bonds as a valuable tool to fund commitments under the Paris Agreement, paving the way for the public and private sector to follow,” notes Caroline Peny, Sustainable Capital Markets, BNP Paribas.
On the heels of the EU, several European countries like France and the UK became regular issuers on the sustainable bond market.
Notably, the UK issued the world’s largest-ever sovereign green bond, with its £10 billion 12-year inaugural Green Gilt, a sustainable finance innovation designed to accelerate the country’s transition to net-zero. Issued just days ahead of COP26, the government aligned the bond to its Ten Point Plan for a Green Industrial Revolution which strives to protect the environment, boost green jobs and accelerate the economy’s path to reach net-zero by 2050.
According to Agnes Gourc, Head of Sustainable Capital Markets, BNP Paribas: “2021 has marked the renewed interest for the green bond market from SSA issuers looking to ‘build back better’ following the pandemic. Italy, the UK, NGEU debut green bonds, to name a few, have all been landmark transactions we have brought to the market, each breaking new records in term of size and order book, showing once again high investor demand for these instruments.” In March 2021, the Republic of Italy issued its inaugural Green €8.5bn bond, a commitment of the Italian government to support public expenditures with positive environmental impact. France also issued a Green OAT to combat and adapt to climate change, protect biodiversity and fight pollution.
2021 has marked the renewed interest for the green bond market from SSA Issuers looking to “build back better” following the pandemic.
Agnes Gourc, Head of Sustainable Capital Markets, BNP Paribas
A year for firsts in Central and Eastern Europe (CEE)
SSA issuers in Central and Eastern Europe also made their debut in ESG debt financing, reaffirming a unified emphasis and commitment that the governments across the region are undertaking in the context of environmental and social policy efforts.
Borys Matiash, Director CEEMEA Debt Capital Markets, BNP Paribas, predicts: “We expect more CEE issuers to continue incorporating sustainability targets and commitments into their debt management strategies and funding activities, paving the way for continuous and successful transition across all segments of CEE economies.”
In the past year alone, Latvia, Slovenia, and Serbia issued their first sustainability bonds, as well as Ukraine’s government-guaranteed offering for the state-owned transmission system operator, NPC Ukrenergo.
We expect more CEE issuers to continue incorporating sustainability targets and commitments into their debt management strategies and funding activities.
Borys Matiash, Director CEEMEA Debt Capital Markets, BNP Paribas
A record year for Latin America
Elsewhere, SSA issuance accounted for over 50% of Latin America’s total green, social and sustainable (GSS) labelled debt issuance in 2021. The $30 billion US dollar-equivalent of SSA volume is an extraordinary 317% increase from 2020.
“The impressive development of Social, Sustainable and SLB instruments in Latin America underscores the region’s shift away from a market that was over 80% Green in 2019 to a more balanced supply of ESG related issuance that includes 23% Sustainable, 23% SLB, 41% Social and 13% Green,” notes Michael Bellantoni, Vice President Sustainable Finance Capital Markets, Latin America, BNP Paribas. He added: “In 2022, we expect sovereigns and other SSAs to continue to anchor the bulk of issuance out of Latin America. We also believe the pipeline for SSAs specifically and ESG broadly remains active, but dependent on constructive market windows for issuance.”
Decarbonisation a Priority in APAC
SSA issuers were also active in Asia throughout 2021. Korea and Japan lead the way, with landmark transactions from seasoned issuers including Korea Development Bank, Korea Housing Finance Corporation, and the Development Bank of Japan. The Hong Kong SAR Government priced its first green bond in Euros, with the total offering of Eurobonds and dollar debt triple the size of the first green bond sold in 2019.
Chaoni Huang, Head of Sustainable Capital Markets, Asia Pacific at BNP Paribas, explains: “More net-zero commitments have made decarbonisation a priority across the region, so we anticipate strong growth in green bonds in particular as we move in to 2022. We also expect SSAs to tap into more specific initiatives, such as biodiversity, which will fine tune the focus on green-labelled bonds.”
We also expect SSAs to tap into more specific initiatives, such as biodiversity, which will fine tune the focus on green-labelled bonds.
CHAONI HUANG, Head of Sustainable Capital Markets, Asia Pacific, BNP Paribas
Leading the way in sustainable SSA bonds: milestones in 2021
Throughout 2021, BNP Paribas has been a natural partner for Sovereign, Supranational and Agency (SSA) clients to access sustainable debt markets, advising and helping them to structure a variety of green and sustainable bonds to help finance the economic recovery and push forward the transition to a more sustainable economy.
BNP Paribas led inaugural ESG issuances for:
- EU’s €20b NextGenerationEU 10yr bond
- Italy €8.5bn 24yr Green BTP
- UK £10bn 12yr Green Gilt
- Bank of Ireland €750m 6NC5 Green HoldCo Senior Bond
- Republic of Latvia €600mn long 7yr Sustainability Notes
- Republic of Slovenia €1bn 10yr Sustainability Notes
- Republic of Serbia €1bn 7yr Green Notes
- Ukraine’s government-guaranteed offering for NPC Ukrenergo US$825mn 5yr Green and Sustainability-linked Notes
- Republic of Peru US$2.25bn 2034 Sustainability Notes, US$1bn 2072 Bonds and €1.0bn 2036 Social Notes
- CABEI’s Inaugural CHF 200m Social Bond
Other SSAs returning to the market included:
- The Republic of France €7bn 23yr Green OAT
- The Federal Republic of Germany €6bn 30yr Green Bond
- France’s Caisse d’Amortissement de la Dette Sociale (CADES) $2.5b 3yr Social bond
- Three separate multi-tranche transactions for the Republic of Chile totalling over US$10bn of combined issuance in USD and EUR
- Mexico’s €1.25bn 15yr SDG Senior Unsecured Notes
- Government of Hong Kong SAR US$2.5bn Multi-tranche Green Bonds
- Development Bank of Japan €600m 4yr Sustainability Bond
- Asian Infrastructure Investment Bank (AIIB) $2.5bn 3yr SEC Registered Global Sustainable Development Bond referencing SOFR