The total value of impact bonds issued slowed down in Q3, with US$165 billion issued during the quarter. It was 34% lower than Q2 2023 and 25% lower than Q3 2022.

Nonetheless, the year-to-date amount of issuance was similar to the same period in the previous year, standing at US$650 billion as of end of September 2023 thanks to increased activities during 1H 2023.

European entities issued the highest amount of impact bonds for the year to date. The region launched US$305 billion of these bonds over the last three quarters, representing 47% of global issuance. However, issuance from Europe was 44% lower in Q3 compared to the previous quarter. Year-to-date issuance was also 4% lower year on year. By contrast, issuance from APAC entities rose, driven by Japan, Korea and Hong Kong. US$196 billion of impact bond was launched in the region, 11% more year on year. Issuance from entities in North America also declined 26% to US$60 billion driven by lower activities among US corporates.

US$395 billion of green bonds were launched in Q1-Q3 2023. The amount was similar to last year, with the percentage of bonds with a second party opinion rising from 93% to 96%. Both China and the U.S., which lags their European peers in seeking a second party opinion, are starting to see fewer green bonds without a second party opinion in Q1-Q3.

In terms of issuance amount, Europe remains the largest issuing region with US$216 billion of green bonds, which is 2% lower year on year. The European Parliament has recently approved a new voluntary standard that will require issuers who use the “European Green Bond” label to disclose the use of proceeds and how they fit into the company’s transition plans, and to ensure at least 85% of the funds are allocated to activities aligned with the EU’s Green Taxonomy. On the other hand, issuance from Asia Pacific entities was 6% higher year on year at US$119 billion, driven by Japan and Hong Kong.

China remained the top issuing country globally with US$66 billion of green bonds launched, followed by German entities which launched US$49 billion of green bonds. Both countries issued a comparatively lower amount of green bonds year on year.

The greenium on a 4-year German Government Green bond issuance versus its non-green twin appeared to shrink beginning mid-August. The yield spread calculated by ICE narrowed from -5.75 bps on 21st August to -3.45 bps on August 30. This is in the context of a general rise in volatility over the last few months for German government bonds, including German government green bonds, due to uncertainty around future European Central Bank rate decisions and rising inflation. More specifically, the government auction on August 30 may have satisfied the investor demand for this term of government bond resulting in a spread more in line with those of the longer dated twin bonds.

The popularity of social bonds surged in Europe during 2021 but has subsequently subsided. The dollar amount of social bonds issued by European entities fell 56% to US$53 billion in Q1-Q3 2023, led by French government entity Caisse d'Amortissement de la Dette Sociale. In the meantime, entities in Asia Pacific doubled their issuance to US$46 billion of social bonds over the past three years. Rising issuance in the region was driven by Korean government agencies and Japanese transportation companies/agencies.

Chart 6 shows the numbers of bonds reporting an intention to fund projects categorized as shown. In some instances, issuers report an intention to fund projects in more than one category and so proceeds may be split.

As of the end of Q3, use of proceeds data is available for 63% of the quarter’s impact bond issuance*. Renewable energy remains the biggest focus for use of proceeds among impact bonds, with over US$66 billion of proceeds planned to be spent on such projects. Meanwhile, ~$57 billion of proceeds are planned for Energy Efficiency Projects and ~US$51 billion of proceeds are intended to be spent on clean transportation projects. There are almost US$60 billion to be spent on projects of socio economic advantage, such as provision of financing and SME funding and ~US$53 billion of funds intended for projects providing essential services across healthcare, education and other provisions.

Among the labelled bond issuers who reported their use of proceeds, only 22% of them were raising entirely new funding, while 73% of them were partially refinancing existing debt as well as raising new funding and 5% of them were solely refinancing debt.

For issuers who reported their project’s beneficiary destinations, countries who received the most project funding include Korea, Malaysia, Japan, China and Germany. Further, among those who are adopting some of the reporting required under the EU Green Bond Standard, 118 of the issuers attempted to explain their contribution to the EU environmental objectives, although only half of them disclose information for the criteria of “Do No Significant Harm”. This lack of disclosure implied limited consideration of how these labelled bonds intended for positive impacts may have caused negative impacts on other aspects of the environment and society.

Half of the issuers who reported their intended timeframe for spending the bond proceeds intend to invest those funds within two years upon issuance. Only 8% of those reporting an investment time period aimed for a shorter investment period of one year, while 7% aimed for investing the proceeds over three years.

After analysing a series of SLBs for evidence of greenium, it is evident that traditional bonds have generally exhibited slightly higher yields compared to SLBs, with a maximum variance of 5 basis points (bps) in favor of the former. Nevertheless, it is noteworthy that there were instances in the graph where the yields of both bond types converges.

An exception to this trend is observed in the case of SLB A issued by a French retail and wholesale company, where SLBs had higher yields than traditional bonds (Fixed Bond A) by a similar margin of 1 to 5 bps across the yield curve. This particular bond issuance appears to be characterized by a more ambitious sustainability agenda, encompassing emissions reduction targets across Scopes 1, 2, and 3.

Ambitious SLB targets seem to instill greater optimism among investors, as they may anticipate the potential for higher coupon rates due to it being subject to coupon reset triggers if targets are not met. As exhibited by SLB A, bonds with more aspirational sustainability goals could be perceived by the market to carry a higher yields due to their potential for coupon increases.

By contrast, other SLBs issued by the same issuer (e.g. SLB B) which carry less ambitious targets, focusing solely on Scope 1 and 2 emission reduction - have lower yields compared to the traditional bonds (e.g. fixed bond B). This could be explained by the market’s expectation that the target will be readily attainable and the anticipation of a coupon increase is lower.