Sustainable finance in fixed income markets – from niche to mainstream

“Sustainable finance” has fast become a stable feature of the financial markets. What started out initially as a simply a discussion around “green bonds” has now expanded to both “social” and “sustainability” labels as well as loan products.

If we were to wind back time five years, the sustainable fixed income market was limited to issuance of green bonds. Since then, it has developed to include social and sustainability bonds as well as a similar array of sustainability-labelled instruments in the loan market.

With the recently published guidelines for green loans and sustainability-linked loans, and the upcoming Annual General Meeting of the International Capital Markets Association (ICMA) Green Bond Principles (GBP) and Social Bond Principles (SBP), we find ourselves increasingly in a market that can better be characterised as “mainstream” rather than “niche.”

Timeline of sustainable fixed income asset supply and publication of related market principles

Timeline of sustainable fixed income asset supply and publication of related market principles

A look back at the market’s development

The growth of the Green bond market started taking off back in 2012-2013, although some may argue that we cannot really talk about a “market” for green bonds until the launch of the Green Bond Principles back in 2014. Since then we have seen updates to the principles almost every subsequent year, and in 2017 came the launch of social and sustainability as separate labels.

Building on the strong momentum of the green bond market, the loan market quickly followed, launching its own set of (almost identical) Green Loan Principles in 2018. However, as the supply development in the chart above shows, the supply of green loans did not see the same exponential growth as the bond equivalent. One of the main reasons for the limited growth is that green assets are hard to come by for most issuers, and, as a result, issuers tend to prefer to use these for bonds (if they have this option, that is) as it has higher marketing value.

However, as also seen in the chart above, the ingenuity of the loan market participants quickly flowed towards another approach of looking at “targets” and “KPIs” for the measure of sustainability instead of the underlying “use-of-proceeds” method championed by the green bond market. As a result of the high activity seen in 2018, a set of Sustainability-Linked Loan Principles was launched in 2019.

Going full circle – increasing focus on guidance and principles

On the back of the strong interest in sustainability-linked loans, the public bond market has started to pick up this trend as well. Last year, Enel, the Italian utility company, became the first issuer to bring a sustainability-linked bond to the market. The bond includes a coupon step-up of 25bp (0.25%) if certain sustainability targets are not met. The transaction is still the only major public bond deal to have included a sustainability link in the documentation, but many expect this to change in the coming months.

One of the key reasons for this is a new working group on “Sustainability/KPI-linked bonds” launched earlier this year by ICMA, which holds the secretariat of the GBPs and SBPs. More than 40 independent organisations have signed up as members of the working group, including Nordea.

Earlier this year, the organisations behind the original Sustainability-Linked Loan Principles and Green Loan Principles announced an updated set of principles together with a new additional guidance document. Similarly, ICMA earlier in May announced a set of high-level definitions for sustainable finance – on the back of publishing a compendium of international policy initiatives and best market practice for sustainable finance back in February.

Looking ahead – still not mainstream, but we are getting there

While it is still early days to talk about sustainable finance going “mainstream” in the fixed income markets, we have certainly made significant strides in recent years. As the chart above shows, sustainability-labelled fixed income instruments have increased in prominence, backed up by an increasingly harmonised, well-defined and market-based set of guidelines and principles.

This development is further supported by the ever-strengthening political and societal push for integrating sustainability into the financial markets. Thus, the question now seems less about whether sustainable finance will become mainstream in the financial markets and more about “how” and “when.”

However, before we can really start to talk about sustainable finance having gone mainstream, we need to see a few more ticks in the checklist. Below are some of the more important ones.

First, the share of sustainable debt instruments, including both “use-of-proceeds” and “target-linked,” will need to increase further relative to “non-sustainable” debt instruments. In SEK, we are already well under way, with more than 20% of all SEK bonds issued last year being in green format. The numbers are lower across the broader markets, but the trend is positive.

Second, key policy tools of the European Commission’s Action Plan on Sustainable Finance will need to come fully into effect. The EU Taxonomy, EU Green Bond Standard and various disclosure requirements are still only at the draft or legislative stages of implementation. Further, additional guidance (but not necessarily outright regulation) on other key policy areas are needed, such as within capital requirements/bank incentives, ESG data and ratings services, and better governance and “policy infrastructure” on sustainable finance. The ongoing consultation from the European Commission should provide additional support for these discussions.

Finally, we need to recognise that this takes time. What we need to see happening is a fundamental shift in mindset and perspective on everything from risk assessment to capital allocation and negative externalities. Such change is as much psychological as practical. Rome wasn’t build in a day – and neither will the mainstreaming of sustainable finance be.

About the authors:

Ebba Ramel, an analyst in Nordea's Sustainable Bonds team


Ebba Ramel is an analyst in Nordea’s Sustainable Bonds team.



Jacob Michaelsen, Head of Nordea Sustainable Finance Advisory


Jacob Michaelsen is Head of Sustainable Finance Advisory at Nordea.

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