Capital Markets Market Trends

A Green Wave: Surge in Green Debt Issuance in September

September saw record-high green bond issuance as both sovereigns and corporates raised over US$40bn in debt capital markets for sustainable projects. This makes September the strongest month for green bond issuance in a year that has seen record-breaking issuances in every month so far.

Green bonds are a type of credit product that are identical to ‘vanilla’ bonds, expect with the specification that the proceeds be invested in projects that generate environmental benefits.

As the need to green the economy becomes more pressing, sovereigns moved to issue record levels of green debt. Spain’s 20-year bond issuance, worth €5bn, was executed on 7th September. Debut green issuances from Colombia and the UK on the 29th and 20th of September respectively, the latter as part of a £15bn Green Financing plan to improve renewable infrastructure across the country. This is in addition to established issuer Germany having issued a new 10-year Green bond.

September’s boom will soon be overshadowed by the EU’s €800bn pandemic recovery Eurobonds, due on the 21st October, 30% of which (€250bn) will have use of proceeds for green investments specifically.

Corporates are participating too; Walmart executed the largest ever green bond issuance from a non-sovereign, US$2bn, for investment in renewable energy sources, energy-efficient refrigeration and to electrify transportation, and waste reduction, in line with their target of net-zero emissions by 2040. “It certainly seems like they’re serious about taking a sustainability leadership role within the retail space,” commented James Rich to Bloomberg, senior portfolio manager at Aegon Asset Management. “I don’t know how other retailers will be able to avoid making similar commitments and changes.”

As green debt supplies continue to rise, some expect pressure on pricing. This is likely overestimated. Cash reserves are high following the summer, green debt issuance has been telegraphed well in advance, and regulatory involvement in sustainable capital markets is increasing, creating an environment for strong investor demand. Market appetite for green debt is stronger than ever. Italy’s issuance in March saw investor demand supersede expectations tenfold, while Walmart’s green bond will yield 50bp above treasuries, revised downwards from initial pricing of 75bp, demonstrative of strong investor appetite for labelled products. This was confirmed following the significant premium — where the bond is priced within the yield curve, at a discount to the issuer — achieved by the British green bond of 2.5bp.

Concern over greenwashing and robustness of ESG claims

Despite the strength of labelled debt capital markets, some regulators and NGOs fear greenwashing may undermine the sustainable value of ESG-labelled bonds. The recommendation is that investors do their homework.

Importantly, scrutiny is increasing. A first of its kind investigation by the American SEC and German BaFin into whether Deutsche Bank’s asset management arm’s has misstated the environmental and social credentials of its ESG-labelled products indicates greater regulatory involvement in sustainable markets. As pressure increases, not just investors, but issuers too will be pressed to clearly demonstrate the validity of their sustainability claims, greatly reducing the risk of falling foul to greenwashing.

Demand for green bonds remains robust; a great deal for issuers

Markets for sustainable bonds continue to grow. 1/4 of all bonds issued in UK and EU markets were labelled green, matched by an 8% in the US as of Q2 2021. Bankers expect issuance of corporate labelled debt — green, social, and sustainable — to reach over US$1tn for the first time this year as firms are more eager than ever to show that they have sustainable business. Green-labelled debt sales alone are set to reach the same milestone by 2023. 

Investors clearly believe green bonds are an investment worth paying for. Market demand has been consistently higher for green bonds than for vanilla in H1 2021. Green bond issuance in EUR saw book oversubscription of 2.9x relative to 2.6x for vanilla equivalents. For USD issuance, the figures were 4.7x and. 2.5x for green and vanilla counterparts respectively. Spread compressions for the two were 0.8bp (EUR) and 5.1bp (USD) higher for green debt.

For issuers, green bonds offer greater access to cheaper capital. “What began with ‘why should I issue?’ is now ‘why aren’t you?’,” comments Marilyn Ceci, global head of ESG debt capital markets at JPMorgan Chase & Co. She told Bloomberg’s David Mutua that she expects July’s issuance total to have doubled by year-end.

This is clearly explained by the data. Relative to identical vanilla counterparts, green bonds often provided lower costs of funding for issuers for H1 of 2021, trading richer on the yield curve: higher in price and lower in yield. Firms and sovereigns issuing debt often provide a new issue premium to entice primary market investors. With green bond issuance, however, 26 of 33 of the green bonds mapped by the Climate Bond Initiative were on or below the yield curves of their vanilla counterparts. This ‘greenium’ is an excellent outcome for issuers.

Both issuers and their underwriters would do well by continuing to take this into consideration and specifying sustainable use of proceeds where possible to secure more favourable funding conditions for the transition to a greener business and economy.

As green bonds become more mainstream, it’s relevant to consider that what is now a ‘greenium’ may soon become a penalty applied to those issuing vanilla bonds — sometimes called ‘brown’ or ‘grey’. Firms that rely on dirtier processes — and their DCM advisors — must keep this in mind and transition towards greener processes where possible, lest they face increasing financing costs in debt capital markets in the near future.

Sources | Further reading

Green bond sales head for records —

EU prepares for €800bn bond issuance scheme —

Walmart’s sustainable bond debut raises bar —

Spain to issue €5bn of green bonds—

ESG bond sales sprint to 1 trillion —

Scrutiny of ESG greenwashing intensifies —

Brussels to issue green bonds —

Climate Bond Initiative (2021), Green Bond Pricing in the Primary Market H1 2021 [online]. [Accessed 16th September 2021 at]

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