The latest quarterly report from the Association for Financial Markets in Europe (Afme) highlighted diverging trends in the European Environment, Social, and Governance (ESG) finance landscape during the second quarter of 2023.
European ESG bond and loan issuance dropped by 23.9 percent year-on-year to 151 billion euro in the second quarter. The quarter also saw an 11.1 percent decrease compared to the first quarter.
ESG bonds and loans include ESG-labelled bonds, sustainable-linked bonds, transition bonds, green-linked loans and sustainable-linked loans. ESG-labelled bonds represented the largest portion of total ESG issuance, accumulating 105 billion in proceeds during the second quarter, with Sustainable & Green Linked Loans following behind at 40 billion, and sustainable-linked bonds representing the remaining 6 billion.
French issuers maintained their leading position in total ESG bond and loan issuance, followed by German and Italian issuers. During the first half, ESG securitisation issuance accumulated 1.1 billion in proceeds. No issuance was recorded in the second quarter.
ESG bond market share shrinking
ESG bond issuance, including ESG-labelled, sustainable-linked and transition bonds, represented 18.6 percent of total European bond issuance during the first half. This compares to 21.3 percent in 2022 and 19.7 percent in 2021.
Despite the quarterly dip, the half-year volumes for ESG-labelled bonds increased by 17 percent compared to a year earlier. This increase was predominantly driven by strong green bond issuance in the first quarter, showcasing resilience in certain areas of the ESG market.
Luxembourg, which considers itself a major hub for green bonds, ranked 13th on Afme’s list of countries with the most green bonds outstanding. Germany, France and the Netherlands were the top three countries, all with more than 100 billion euro outstanding. With about 25 billion euro outstanding, Luxembourg is just ahead of Austria and Switzerland.
Sustainable-linked bonds decrease
The sustainable-linked bond market witnessed a sharp decline in the second quarter with 46.5 percent quarter-on-quarter and a 16.3 percent year-on-year decrease. No ESG securitisation issuance was recorded during this period, reflecting a more challenging environment for specific sustainability-focused products, Afme said.
Carbon prices diverge
EU and UK carbon prices have shown divergence during the year. European Union Allowance (EuA) carbon prices stood 10 percent above December 2022 levels, while UK carbon prices saw a decrease of 35 percent over the same period.
Marginal increase for global ESG funds
Global ESG funds, including mutual funds and ETFs, reached a value of 8.4 trillion dollars as of the second quarter. This represents a 25.3 percent increase from the same quarter a year earlier but a marginal decrease of 0.1 percent when compared to the first quarter.
This marginal quarterly decline was further marred by net fund outflows, accumulating to a total of 26.3 billion dollars during the second quarter of 2023.
ESG spreads widen
In terms of ESG price premia, spreads of corporate ESG bonds against non-sustainable benchmarks widened during the second quarter. These spreads increased from approximately 0.2 basis points at the start of April to roughly 1.8 basis points in late July 2023, Afme said.