Sustainaweekly - ESG labelled euro bank bonds issuance in Q3 - Overview
82 ESG labelled euro bank bonds have been issued so far this year, 31 of which were in the third quarter alone. Large volatility in financial markets has resulted in more ESG bond issuance, which has attracted large demand from investors. Still, the large demand could not prevent NIPs from rising, having reached an average of 27bp in Q3. Riskier ranks of debt, like SNP and Tier 2, have seen the largest increase in NIPs this quarter.
Since the beginning of the year, supply of ESG labelled euro bank bonds has been increasing every quarter, with a total of 82 bonds being issued so far this year, totalling EUR 53.9bn.
ESG bond issuance in the last two quarters has been larger than in the first quarter, while at the same time market conditions deteriorated, reflected, for instance, by a rise in the iTraxx Senior Financials index (see chart below). As such, it seems that banks increasingly used ESG labelled bonds to assure sufficient demand against the backdrop of fragile market conditions, and investors taking risk-off positions.
Indeed, demand for ESG labelled bonds has been strong, while in the first quarter EUR 15.85bn of ESG bank bonds were met with EUR 32.3bn of demand in the primary market, in the third quarter investors put in orders worth EUR 49.3bn for EUR 20.9bn of ESG labelled issuance.
Still, strong demand has not resulted in issuers being able to achieve greeniums – that is, the pricing advantage from ESG bonds vis-à-vis non-ESG ones. In fact, new issue premia (NIPs) were quite large in Q3 when compared to previous quarters. ESG bond issuers paid an average NIP of 27bp in Q3, which compares to 13bp in Q2 and 8bp in Q1. This compares to an average NIP of 10bp that was paid for non-ESG labelled bank debt in Q3.
A closer analysis per rank of debt indicates that ESG bonds issued in riskier type of debt format paid larger NIPs in Q3 when compared to the previous quarters. This is particularly the case for SNP bonds and for Tier 2 bonds. However, the difference is larger for Tier 2 bonds due to the amount issued. While in the first quarter no Tier 2 ESG labelled bond was issued, in the third quarter three ESG labelled Tier 2 bonds were issued. On the next page, we present the average NIP per debt rank for each quarter of 2022. For ESG covered bonds, the average NIP has been quite stable through the entire time period.
Finally, and taking a closer look at this quarter specifically, issuance has been quite diverse in terms of geographical dispersion. Out of the 22 jurisdictions that have issued euro bank debt so far this year, 15 issued at least one ESG labelled bond in Q3. Germany still stands out, as German banks issued eight ESG labelled bonds out of a total of 27 bonds in Q3. And issuers from South Korea and Hungary issued exclusively ESG labelled bonds so far in 2022.
This article is part of the Sustainaweekly of 3 October 2022