The European Green Deal announced in December 2019 aims to reduce greenhouse-gas emissions in the European Union by 50 per cent to 55 per cent from 1990 levels within a decade and to achieve zero net emissions by 2050.
That will require EUR260 billion of additional investment by 2030 according to the European Commission, which aims to mobilise at least EUR1 trillion in investment. Most of that will have to come from the private sector – which should support the continued growth of green bonds.
Green bonds are funds raised to finance environmentally-friendly projects. A record USD228 billion of green bonds were issued in 2019 and we now expect issues this year to total USD250 billion to USD300 billion.
The EU does not have the ability to directly collect taxes or raise debt, however. It can legislate or regulate to achieve its policy aims – on vehicle emissions, industrial pollution and packaging, for instance – but the costs fall largely on the private sector.
Meanwhile the European Commission wants at least 30 per cent of the InvestEU Fund, the successor from 2021 to the Juncker Plan, to be used for climate projects. The aim is to stimulate EUR650 billion of additional investment but most of that will come from the private sector.
The non-profit European Investment Bank, which backs projects that advance the EU’s policy goals, has already issued USD33 billion of green and sustainability bonds. It now brands itself as the EU’s ‘climate bank’ and more than a quarter of its lending is currently for climate-change adaptation and mitigation.
The EIB wants half its lending to support climate action and environmental sustainability by 2025 but it is already approaching its lending limits, putting pressure on the private sector to bridge the gap.
Indeed, most of the funding for the European Green Deal will have to come from the private sector. Perhaps much of this finance would have happened anyway, but we think the Green Deal should provide a strong tailwind to green bond issuance.
We estimate that there are USD647 billion of green bonds outstanding with 44 per cent issued by European organisations. Emerging Asian markets account for 21 per cent and North America just 18 per cent. Some 43 per cent are euro-denominated with 29 per cent in dollars and 14 per cent in Chinese renminbi. Last year’s USD228 billion of new issues was 49 per cent higher than 2018 with Europe’s share rising 64 per cent to USD110 billion.
Additional to the green bonds, a record USD65 billion of social and sustainability bonds were issued last year with Europe’s issues rising 76 per cent to USD28 billion. North American issues more than trebled but were still only USD6 billion. We estimate the outstanding total of these bonds at USD128 billion, just over half from European issuers and the euro again the most popular currency.
We expect the supply of social and sustainability bonds to reach USD75 billion to USD100 billion in 2020.
A new EU Green Bond Standard, voluntary but stricter than the existing industry standard, emphasises the European Union’s commitment to this form of finance. It embraces an EU Taxonomy that defines in detail economic activities considered environmentally sustainable.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Dominic Kini
Fixed income: Basis for financial analysis
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has three principal aims in its fixed income research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to three months, relating to specific instruments and segments of the yield curve, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; 3) to express views on the likely future performance of sectors, benchmark indices or markets in our fixed income strategy products.
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Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve over the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
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All Covered issuers
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