A record-breaking year for sustainable bonds (again!)

The growth has been rapid over the past few years and the growth rate shows no signs of slowing down – rather the opposite.

In 2021, global issuance grew by more than 100 percent compared to 2020. In Norway, the figure was a whopping 130 percent and every fifth krone issued in the bond market had either a green or sustainability-linked label. Compared to five percent globally.

Sustainable bonds are not a new concept in the market, the first one was issued already in 2007 by the European Investment Bank. Since then, the market has been dominated by green bonds, where proceeds must be earmarked for specific investments with environmental benefits. Thanks to this additional layer of transparency, these bonds have become attractive among investors looking for sustainable investments. As the market has evolved and become more sophisticated, green bonds of all shades have come to market. We have seen light green bonds financing significant emission reduction initiatives in hard-to-abate sectors, as well as dark green bonds financing renewable energy generation.

We need to see all sectors contribute to the green transition, and hence we need to continue to see green bonds of various shades. We should always focus on the long-term, dark green, solutions, but where they are not yet available, light-green investments can be important steps in the right direction.

In 2021, we also saw a new product enter the market – the sustainability-linked bond. In contrast to green bonds, these bonds require no earmarking of proceeds but instead the financing cost is linked to the sustainability performance of the issuer. This creates an additional incentive for the company to reach their sustainability targets, as their cost of financing may increase if they don’t.

For many companies, green bonds may not be relevant in practice. Perhaps they are not an investment-heavy business with large enough projects, or they are taking their first steps in their sustainability journey and are not yet green enough. If the company has an ambitious sustainability agenda in place, with clear targets, then sustainability-linked bonds can instead be a good alternative.

Sustainability-linked bonds should not be seen as a replacement for green bonds, rather a relevant complement. Both structures increase transparency and accountability, and signals to investors that the issuer is working systematically with sustainability. For some companies both solutions can be relevant, depending on where in their investment and sustainability cycle they currently are.

There are two key elements of sustainability-linked bonds. Firstly, the sustainability target or targets integrated into the bond must be relevant for the issuer and its industry. Secondly, the targets must also be ambitious and above a business-as-usual trajectory.

This is the challenging part of this market and here we as a bank, together with investors, must ensure we set the bar high enough so that the product can truly work as the incentive it is meant to be.

In January 2021, Odfjell SE became the first Nordic company to issue a sustainability-linked bond, also marking the first globally within shipping. The company chose to link the bond to their sustainability target of reducing the carbon intensity of their fleet by 50 percent by 2030, compared to 2008 level.

- Sustainability for us is about being long-term and making good and responsible decisions for the future. It has been part of Odfjell's 107-year history. For the past 15 years, we have worked actively to streamline the fleet, reduce consumption and emissions, and to have the most environmentally friendly and energy-efficient fleet possible, says Øistein Jensen, Chief Sustainability Officer at Odfjell.

- Issuing a sustainability-linked bond enabled us to have a closer dialogue with investors about sustainability. The positive feedback we received from investors already in the preparatory phase of the process was crucial for our decision to issue a sustainability-linked bond instead of a regular one, and for the successful outcome, says Jensen.

Many issuers testify to similar stories, where both green and sustainability-linked bonds provided them with a valuable arena to share their sustainability ambitious with investors. This may not only result in a better pricing but can also be an efficient way of sharing information around sustainability ambitions and progress with a wider group of stakeholders.

It still remains to be seen what 2022 will bring, but with investors focusing on aligning their portfolios with net-zero emission targets and the European Union firmly increasing regulations around sustainability reporting and transparency, we can expect sustainable bonds to remain important for companies in their quest of ensuring continued access to capital in the years to come.