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MainStreet Partners: Green bonds particularly ‘sensitive’ to interest rate rises

MainStreet Partners, the London-based ESG Advisory and Portfolio Analytics firm, has today released its latest report on the state of the Green, Social and Sustainability (GSS) bond market. The quarterly report outlines the current and future role of GSS Bonds in reaching global environmental and societal targets. 

The report provides a clear and concise view of the challenges posed by rising interest rates and helps demystify some key issues related to green bond price premiums and sustainability-linked bonds’ (SLBs) quality and usability. The report also outlines headline data and drivers for some of the main countries of development for GSS bonds: the United Kingdom, Italy and Spain.

Key takeaways from the Report:  

· Green bonds, and green bond funds, due to their higher ‘duration’ are particularly sensitive to changes in interest rate, which could explain the more volatile performance during the first quarter of 2022.

· Based on MainStreet Partners’ analysis on $2 trillion in GSS bonds outstanding, green bonds, on average, display an alignment to the EU Taxonomy of 64%, with Renewable Energy projects showing the highest activity-level alignment on average (77%).

· The United Kingdom has shown the greatest growth in annual issuances of GSS bonds in 2021 – well above 400%. The private sector has been the main driver of growth in issuances. While 70% of bonds were directed towards environmental projects in 2021, contrary to the general trend, the most common social project categories were affordable education and healthcare (53% of total).

· Italy saw a +400% growth in annual GSS bond issuance in 2021. Climate remains the focus, with electric utilities representing the main issuer type and renewable energy being by far the most common use of proceeds category. The country is also the largest market for SLBs today.

· Spain’s GSS bond market has grown in line with the broader market in 2021, marking a 90% increase in annual issuances, thanks in part to the first Sovereign bond in October 2021. Banks and local governments are among the most common issuers, and they tend to prefer the “green” label over “social” or “sustainability-linked” issuances

Commenting on the findings, Pietro Sette, Research Associate at MainStreet Partners, said“Despite the inevitable challenges from global supply chain disruptions and tightening monetary policies, the GSS bond market continues to benefit from long-term trends of regulation and a growing appetite for ‘dark-green’ investments. Green bonds, especially those investing in renewable energy, have shown a high degree of taxonomy alignment. These will play a major role for investment strategies seeking to prove their ‘sustainability objectives’. 

“Sustainability-linked bonds (SLBs) are also pushing improvements in the ESG credentials of bond issuers. The trend remains strong. SLBs are the only GSS bond type with a higher amount issued to date compared to the same period last year, even in the face of significant market turbulence.”

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