ESG Transformation of the Fixed Income Market

Since the European Investment Bank issued the first green bond in 2007, the Green, Social, and Sustainability (GSS) bond market has moved from a niche market dominated by supranationals into mainstream finance.

Between 2015 and 2021, GSS bond issuance skyrocketed from less than EUR 30bn in 2015 to close to EUR 500bn - increasing close to seven-fold in just the last three years alone, in large part driven by Covid-related health expenditures funded by social bond issuance.

Drawing on a survey of investors, asset managers and current and potential issuers, as well as on our analysis of regulatory and market developments, PwC forecasts European GSS bond issuance to reach between EUR 1.4tn and EUR 1.6tn by 2026 - accounting for close to 50% of total European bond new issuance in a high-growth scenario.

1. Major Acceleration on Bond Issuance

Investor Demand on the Rise

Sustainability considerations have moved from being an “nice to have” option to becoming crucial to an increasing proportion of investors, reflecting new regulatory requirements and changing societal expectations - particularly in Europe. 88% of our surveyed investors say they will further increase their allocation to GSS bonds in the next 24 months. 

The main barriers to further growth from investor's demand identified in our survey - a lack of liquidity in secondary markets and fears of "green-washing" due to inconsistent standards around the use of GSS proceeds and weak reporting - are likely to be addressed by additional market growth, increasing standardisation and tightening regulation, particularly through the new European Green Bond Standard. With GSS bonds securing a risk/return balance similar to that of conventional bonds, while also fulfilling rising ESG preferences, investor appetite for this instrument will continue to carry the market to new records.


Uptake of GSS Bond Issuance

Our analysis suggests a major acceleration in issuance by new and existing players in both the public and private sectors, drawn by reputational benefits and access to a broad and committed investor base. The main challenge will remain the identification of a pool of compliant assets that can be eligible for GSS bond issuance, and the expertise needed to go through the issuance process.

Within the public sector, which has up until now dominated GSS issuance, we have projected continued rapid growth in European supranational issuance, largely based on announced EU and EIB plans regarding GSS bond issuance up to 2026. We have also looked at the expenditure composition of the national EU member state budgets, estimating the potential percentage taxonomy- or sustainability- aligned expenditures, and derived from this a trajectory for sovereign GSS bond issuance. This analysis suggests further steady growth in public sector GSS issuance in the coming years which will reach EUR 712bn by 2026 – up from EUR 266bn in 2021.

On the private sector side, we expect private sector issuance – particularly from the non-financial corporate sector – to gain importance in terms of GSS bonds new issuance in the coming years increasing from 46.5% in 2021 to 49.1% in 2026. GSS bonds may be particularly attractive to CFOs as a transition financing tool as they are well designed to attract external financing for the specific purpose of sustainable or transition projects in organisations that also have non-sustainable business activities.


Key Market Developments

  • Despite a great run from Social and Sustainability bonds,  Green bonds will continue driving the market.
  • Energy, Building and Transport to guide the EU sustainability transformation. 
  • As Covid-19 fades away, medium to small bonds are expected to gain back some market share. 
  • Currency diversification will continue to decrease as the Euro increases its dominance.
  • Sustainable securitised products show signs of promising development, even though the amount of compliant  underlying assets can pose a limit to this growth.
  • Sustainability linked bonds (SLBs) claim their seat at the big table after a staggering first half of 2021. That being said, SLBs remain significantly different from GSS “use of proceeds” bonds as they are not earmarked for specific projects underpinned by recognised sustainability standards, but are instead linked to corporate wide sustainability targets on which the coupons are set. There remains to be seen how EU and international regulatory developments will affect the development of this product. 

2. GSS Bonds : A New Way of Financing

Our analysis suggests a major acceleration in issuance by new and existing issuers in both the public and private sectors, drawn by reputational benefits and access to a broad and committed investor base. Yet many potential GSS issuers and their CFOs still remain highly challenged by a lack of understanding of the GSS bond market. 

To this end, we have developed a 5-point plan that – if applied together and tailored to an organisation’s specific needs – will ensure a smooth and successful transition; enabling issuers to leverage this financing vehicle to finance sustainable transformations of their business models and operations.

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ESG Transformation of the Fixed Income Market?

About our European Sustainable Finance Series and this report

After 2022: the opportunity of the century and EU Private Markets: ESG Reboot, this paper marks the third installment in our European Sustainable Finance Series. The aim of this report is to explore how the rise of Green, Social and Sustainability bonds is likely to reshape the bond market, and what it means for issuers and investors. 

After predicting a major acceleration in issuance by new and existing players in both the public and private sectors, we make recommendations as to the key actions that potential issuers should consider  to unlock the opportunities GSS bonds present as a new way of financing. Our report is based on a wide range of primary data gathered through a Europe and North America-focused survey of more than 200 investors and actual or potential issuers of GSS bonds. 

Contact us

Olivier Carré

Deputy Managing Partner, Technology & Transformation Leader, PwC Luxembourg

Tel: +352 49 48 48 4174

Andrew McDowell

Strategy& Partner, PwC Luxembourg

Tel: +352 49 48 48 2034

Dariush Yazdani

Partner, Global AWM Market Research Centre Leader, PwC Luxembourg

Tel: +352 49 48 48 2191

Giuseppe Corsini

Capital Markets Leader, PwC Luxembourg

Tel: +352 49 48 48 4957