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MainStreet Partners lifts the lid on the status of the Sovereign GSS bond market and what to expect moving forward

MainStreet Partners, the London-based ESG Advisory and Portfolio Analytics firm, has today released its third quarterly Green, Social and Sustainability-linked (GSS) bond report. This edition focuses on sovereign bonds, their Environmental Impact, and the effect on global GSS capital markets of greater government spending.

MainStreet Partners has over a decade of experience in the sustainable debt market and offers its perspective of the current and upcoming dynamics that are fundamentally shaping how corporations and governments are receiving capital from investors.

The report provides an extensive overview of two important segments of the GSS bond market: Europe and the Emerging Markets. The analysis outlines the effect of programs, such as the European Next Generation Fund, on the stock of green projects and illustrates how Emerging Markets issuers have been playing a major role in the GSS Bonds market in recent months.

Since 2010, MainStreet Partners’ proprietary GSS bonds databases have provided a unique set of tools to investors to measure and manage sustainability risks and KPIs. The 3 main products applicable to GSS securities are:

· Bond Ratings – GSS bonds are analysed according to a proprietary framework that focusses on issuer-specific and bond-specific factors.

· Impact Results & Impact Ratings – impact data reported by GSS bond issuers are aggregated and normalized, based on a set of environmental and social variables.

· EU Taxonomy Alignment – environmental projects financed by GSS bonds are measured against the regulatory criteria. Like ‘Bond Ratings’ and ‘Impact Results and Impact Ratings’, the data can be aggregated at portfolio level and provide a quantitative indication of its sustainability.

Key takeaways from the Report:

· The ‘cannibalisation’ of projects is a real risk to sovereign issuers in Europe as EU-driven schemes are reducing the pool of available projects to be financed by sovereign issuers’ green bond programmes

· The spike in social bond issuance during the COVID-19 pandemic could soon be replicated as European governments look to alleviate the burden of the current cost of living crisis

· GSS Bonds issuance in Emerging Markets (EM) looks in shape. Comparing the first 9 months of 2022 to 2021, EM’s issuance fell less than the global market (-24% vs -31%)

· Sustainable finance regulatory advancements across Emerging Markets and cooperation between different jurisdictions will be crucial to achieve global climate goals

· Based on analysing over 5,000 datapoints of GSS Bonds Impact Results, sovereigns were found to report on more metrics (e.g., CO2 Avoided) than corporates (3.4 vs 2.6), but their Impact is lower (57th percentile vs 43rd percentile)

Commenting on the findings, Jaime Diaz Rio Varez, Research Analyst at MainStreet Partners, said: “2022 has been a turbulent year for the bond market, and GSS bonds have not been immune. Despite the lower-than-expected issuance volumes, there are current and upcoming dynamics that may positively influence the overall market in the longer term. This report really dives into the main factors we see affecting GSS bonds issuance in Europe and the Emerging Markets.

In Europe, government programmes, paired with long permission times, are ‘cannibalising’ some green bond projects that would otherwise be financed through sovereign green bonds.

Emerging Markets (EMs) are a positive surprise this year. Volumes compared to 2021 are lower, but by a smaller margin than most other regions, and issuers are getting more comfortable with high-impact structures (such as Belize’s blue bond). We also expect regulation to have a positive impact on issuances, increasing issuers’ transparency and investors’ confidence.”

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