Municipal bonds holding an environmental, social or governance designation are expected to hit $62 billion in 2022, amassing a larger share of the U.S. municipal market, according to S&P Global Ratings baseline projections.
That increase would represent a $14 billion jump over 2021, S&P analysts wrote in a Thursday report, adding they expect international issuance of ESG bonds, including corporates and sovereigns, to hit $1.5 trillion globally.
While muni ESG bond issuance is expected to increase 34%, S&P forecasts the entire municipal market will grow only 2% to $485 billion in 2022,
“Our baseline for municipal sustainable issuance projects the segment’s market share will increase to about 13% of the total municipal market,” S&P analysts wrote. “Sustainable debt represented 9.7% of the municipal market in 2021, a substantial increase from 5.5% in 2020, and 3.2% in 2019.”
S&P analysts also hedged on either side of their baseline projection, saying their lower-case scenario projects growth of $50 billion, for 12% market share, and the higher-end figure was $80 billion, for about 17% of the municipal market.
According to Refinitiv MMD and SDC data, total ESG issuance in January 2022 was $1.065 billion, about $100 million less than the $1.173 billion issued in January 2021. Although total issuance in January 2022 was lower than the prior year, it would seem that ESG issuance is not on pace to decline in 2022, according to a report by Brad Cappello at Refinitiv MMD. In 2021, Refinitiv MMD and SDC data reported $42.058 billion of total ESG issuance, with the top 10 issuers accounting for $31.568 billion of it, led by California, New York and Washington.
ESG muni issuance has been climbing for the past few years, rising 71% to $45.9 billion in 2021 from 2020’s then-record year, S&P analysts wrote.
S&P included financings registered as green bonds by the Climate Bonds Initiative, municipal bonds that received Green Evaluations by S&P Global Ratings, and other self-labeled green, social, and sustainability bonds identified by S&P Global Ratings based on its review of offering statements. Although bonds make up the vast majority of the database, S&P also included notes, loans, and private placements carrying one of the sustainable debt labels, where sufficient information is available to classify in its database. Total municipal market issuance data cited by S&P is per The Bond Buyer.
Intercontinental Exchange in a recent report on impact investing said that over the past five years, the dollar amount of muni issuance increased by 272% while the number of impact bonds issued jumped by 347%. The number of securities issued grew by 102% to 5,990 bonds year-over-year, ICE said.
ICE defines impact bonds as green bonds, social bonds and sustainable bonds that are either declared as such by the issuer or certified by a third party. Market participants would like
The Municipal Securities Rulemaking Board, in fact,
In 2021, social bonds saw the biggest jump, increasing 148% to $16.9 billion, followed by sustainability labeled bonds rising 81% to $7.3 billion, while green-labeled bonds saw the least increase at 36%, but the highest issuance at $21.7 billion, S&P analysts wrote.
Bonds issued to finance affordable housing projects and carrying a social or sustainability label increased by $14.5 billion in 2021, nearly three times the prior year’s figure. This equated to 76% of the total annual growth in the sustainable debt market, S&P analysts wrote.
Multiple state-level entities contributed to that growth, but issuance by the California Statewide Communities Development Authority Community Improvement Authority was “instrumental in driving total figures higher in 2021,” S&P analysts wrote. CSCDA CIA, a California state finance authority and conduit issuer, sold 54 distinct social bonds totaling $4.2 billion in 2021, equal to 9.1% of all municipal sustainable debt for the year, according to the rating agency.
Affordable housing was the leading sector overall of municipal ESG issuance with slightly more than 24% of total issuance at $28.3 billion, S&P said. Other leading categories were water at 24% of total issuance with $28 billion, transportation at 21% or $24.4 billion and green buildings at 16% or $18.7 billion.
“In our view,” S&P analysts wrote, “this is a high-profile example of the potential for decisions by state-level entities to generate large swings in sustainable debt issuance figures even as the segment grows.”
In the longer term, S&P analysts said they think market segment growth will depend on whether a distinct pricing advantage emerges for green bonds.
“This remains a subject of ongoing debate, with most findings suggesting a lack of any material price advantage, or 'greenium,' in the municipal market,” S&P analysts said. “There are a few anecdotal instances where a marginal greenium may have been observed, including Oberlin College’s green bond transaction that priced five basis points tighter than the non-green issue that sold simultaneously, in 2021, according to Janney.”
A modest greenium appears to be developing outside of the municipal space in the global sustainable debt market, S&P analysts added.
