The Sustainability-linked Finance market is projected to witness a compound annual growth rate of 98.32% to grow to US$17,311.992 billion by 2026, from US$143.472 billion in 2019. Sustainability-linked Financing refers to the performance-based financial instruments that put no restrictions on the use of financing provided through sustainability-linked channels and allow the issuer or borrower to utilize the funds for any specified purposes, not limiting its use for green expenditure and activities. Further, Sustainability-linked financing allows companies to improve their sustainability performance and provides an opportunity to leverage sustainability disclosures to access a rapidly growing credit market funded through sustainability-linked financing.
The sustainability-linked financial instruments can be classified into sustainability-linked bonds and sustainability-linked loans. The growth in the market has been underpinned by frameworks and principles governing the functioning of these financial instruments. Similarly, recent developments in the Sustainability linked bonds market have further augmented the demand for sustainable-linked finance instruments. Recent Bond frameworks issued by the International Capital Market Association (ICMA) include sustainable bond guidelines (2018), Sustainable bond guidelines (2018), and Sustainability-Linked Bond principles (2020) among others that have helped in addressing investor concerns about greenwashing and have provided assurance to the bondholders. Similar initiatives have been brought about for sustainability-linked loans, thereby driving investor confidence in the market and propelling growth in the sustainability-linked finance market. Moreover, issuers and borrowers are rapidly adopting sustainability-linked finance owing to flexibility in raising sustainable finance while retaining full flexibility to apply the proceeds therefrom. Financial intuitions and investors are increasing their participation in sustainability-linked instruments owing to the ability to retain full recourse over the borrower or issuers by ensuring through the terms of the instruments, that the borrowers’ or issuers’ SPTs are subject to external verification or reporting. The Sustainability-Linked Finance market is segmented based on instrument type, performance metric, industry, and geography.
Impact of COVID-19 Pandemic
The COVID-19 pandemic has had a net negative impact on the sustainability-linked finance market. The sustainability-linked loan market witnessed a decline in market value, whereas the sustainability-linked bond market witnessed a surge during the pandemic. The net negative impact was due to the decline in the sustainability-linked loan market which holds a significant market share as compared to sustainability-linked bonds. The sustainability-linked finance witnessed coming of age in 2020 owing to the COVID-19 pandemic and due to the ongoing sustainability concerns. However, the COVID-19 pandemic induced volatility, the initial phase of the pandemic witnessed a surge in the issuance of sustainability-linked bonds. According to Network for Greening Financial System (NGFS), sustainability-linked bonds, growth levels reached triple digits, albeit from a low level. Whereas, according to Refinitiv, the third quarter of 2020 saw a record $155 billion of sustainable finance raised. A major portion was channeled towards tackling the effects of COVID-19 as government agencies, corporates, and supranational bodies had borrowed money to support business segments affected by the pandemic. The shift in the usage of funds resulted in a commendable first year for sustainable linked bonds. For instance, according to a GARP comparative study, large financial institutions JP Morgan, Goldman Sachs, Bank of America, and MasterCard among others issued sustainability bonds to finance areas relating to renewable energy and housing. The pandemic caused a dip in sustainability-linked loans as companies and lenders focused more on short-term financing solutions. However, SLL picked up pace in late 2020 and is further expected to move along a positive trajectory over the forecast period owing to the evolving emergence of ESG and similar investment programs, thereby increasing the demand for sustainability-linked loans.
Utility sector to register significant growth
Utilities are enterprises that maintain and offer infrastructure and services for public services. They are subject to public and regulation by statewide government policies and local community-based groups. Utilities supply essential goods and services such as water, gas, electricity, telephone, and other communication systems. Besides, the sustainability-linked financial market for utilities has grown exponentially since its inception and holds a dominant share in the sustainability-linked loans segment. Utility companies have dominated the sustainability-linked market through the issuance of a variety of sustainability-linked financial instruments. For instance, Swedish state-owned utility, Vattenfall AB secured a deal to get a EUR 2billion multicurrency debt financing in the form of a sustainability-linked loan. Furthermore, in 2021, Enel issued the largest SLL to date. The rapid growth of SLLs has prompted other linked instruments to gain momentum, notably SLBs. For instance, an Italian utility company, Enel S.p. issued the first two SLB's in 2019 linked to its target of increasing renewable energy. Similarly, in March 2021, American utility company, Schneider Electric became the first company to issue sustainability-linked convertible bonds. Similarly, Austrian utility company, Verbund issued sustainability-linked green bonds to expand hydropower plants and smart grids in Austria.
Europe to have a major share
The European sustainability-linked finance market growth is mainly driven by key developments taking place in countries like Germany, Spain, and Italy. The European sustainable finance market has grown significantly in recent years and is still experiencing an upswing despite the COVID-19 crisis. The European climate targets and the sustainability policy are also addressing the financial system. "Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development", demands the Paris Climate Agreement.
The European Commission's Action Plan on Sustainable Finance aims to strengthen the role of the financial sector in achieving a functioning economy in which environmental and social policy goals are achieved. In December 2019 the European Commission presented the European Green Deal. Here in the European Union stated it would become the first climate-neutral economic area by 2050. The financial sector will play a key role in the implementation of this plan. In order to implement the Green Deal considerable investment is planned with which (private) capital for environmentally friendly projects in the whole of Europe will be mobilized.
In recent years the market for sustainable investments has developed rapidly and further new products will be added. For example, there has been rapid growth in green financial products, e.g., Green Bonds, whose issue proceeds may only be used for green sustainable purposes in the upcoming years. In the financing sector in addition to the green loans - where the funds must be used to finance green projects, "Sustainability Linked Loans" have taken increasing control of the German financial market. The use of loans here is not restricted to green purposes. Instead, the financing costs are linked to the sustainability performance of the borrower.
Countries in the region are formulating progressive policies and taking various strategic actions in order to increase the adoption of sustainability-linked finance in Europe. For instance, in May 2021, the German government announced the launch of a new sustainable finance strategy, aimed at mobilizing capital flows to sustainable investments, mitigate climate risk and strengthen financial market stability. As part of its new strategy, the government stated that it will set requirements for sustainability reporting for companies. Additionally, German corporates like Telefónica Deutschland, in December 2019, concluded a so-called "Sustainability-Linked Loan" in the amount of 750 million euros via its subsidiary Telefónica Germany GmbH & Co. OHG, the interest margin, of which is linked, among other things, to the fulfillment of ESG criteria in the areas of environmental and climate protection, social commitment, and corporate management. Similar to Germany, Italian fashion company and certified B Corp Save the Duck, in March 2021, was granted a €3 million loan which will be used to accelerate its environmental, social, and governance (ESG) operations. The sustainability loan was awarded by Italy’s largest bank, Intesa Sanpaolo, and requires to Save the Duck to pay it back over the next six years, which is further expected to push the widespread adoption of sustainability-linked finance in the region.
Frequently Asked Questions (FAQs)
Q1. What are the growth prospects for the sustainability-linked finance market?
A1. The global sustainability-linked finance market is projected to grow at a CAGR of 98.32% during the forecast period.
Q2. What is the size of the global sustainability-linked finance market?
A2. Sustainability-Linked Finance Market was valued at US$143.472 billion in 2019.
Q3. What will be the sustainability-linked finance market size by 2026?
A3. The sustainability-linked finance market is projected to reach a market size of US$17,311.992 billion by 2026.
Q4. What factors are anticipated to drive the sustainability-linked finance market growth?
A4. The growth in the sustainability-linked finance market has been underpinned by frameworks and principles governing the functioning of these financial instruments.
Q5. Which region holds the maximum market share of the sustainability-linked finance market?
A5. The European sustainability-linked finance market growth is mainly driven by key developments taking place in countries like Germany, Spain, and Italy.