SUSTAINABLE FINANCING has racked up almost half a trillion dollars of deals worldwide in 2019, fueled by a list of notable firsts. Next year may be even bigger.

Debt sales may keep growing after this year’s 46% boom to about $460 billion because more product types, industries and regions have entered the market, broadening a segment traditionally focused on European infrastructure green bonds. Buyer appetite has also taken off amid global climate concerns, as well as European Union (EU) efforts to boost the use of environmental, social and governance (ESG) financing.

“I just see more and more interest in this market,” said Michael Ridley, global head of ESG fixed income research at HSBC Holdings Plc. “Investors are keen to put money to work in sustainable finance, they just need guidance on the products, policies and positioning.”

The EU may help fire growth as it is readying a sustainable-finance framework — which may become a global standard — as well as drawing up measures that will force fund managers to pay more attention to ESG factors. Rising appetite for sustainable investments has also supported breakthrough debt deals this year in Asia, leveraged loans and CLOs, as well as Enel SpA’s first global sale of bonds with ESG-linked coupons.

“There is massive demand from institutional investors,” said Laetitia Girolami-Boyer, director for sustainable finance at BNP Paribas SA, which worked on the Enel deal and is among the top arrangers of sustainability-linked loans. “Growth is going to continue and we are going to experience requests from more complex sectors.”

Inflows into ESG bond funds surged more than sixfold this year to about $28 billion, according to EPFR Global data.

Green bonds will likely remain the core of the ESG market in 2020, with Commerzbank AG, HSBC and TD Securities, Inc. among banks predicting rapid growth again next year. New sovereign issuers may fuel expansion, potentially including Denmark, Germany, Peru and Sweden. Global green bond sales have jumped this year to about $253 billion from $182 billion for the whole of 2018, according to data compiled by BloombergNEF.

More companies may enter the market, beyond the traditional core of banks and utilities, due to investor demand and pricing advantages, according to Andrew Karp, head of global investment grade capital markets at BofA Securities. Bearings maker SKF AB highlighted so-called greenium cost-savings when it sold a rare industrials green bond last month. Apple, Inc. and PepsiCo Inc. were among other corporate green bond issuers this year.

The EU’s ESG taxonomy could encourage further corporate issuance by boosting confidence in the market and potentially setting clear criteria for targeted support by governments, regulators or central banks, according to Boris Kopp, Deutsche Bank AG’s head of capital solutions and sustainable financing for debt capital markets.

“If that happens, then you’ll see pricing benefits,” he said.

Italian utility Enel opened a new market this year by selling bonds with borrowing costs tied to ESG targets. The notes are more flexible than traditional green bonds as there are no constraints on how the money is spent. More companies may issue similar notes, even if they are unlikely to supplant green bonds, according to HSBC.

Target-linked pricing has already transformed the sustainable loan market, with ESG-linked deals more than doubling this year to $93 billion from $42 billion in all of 2018. By contrast, global issuance of green loans is headed for the first decline since 2013.

The boom has seen the structure break into European leveraged loans this year, as well as Germany’s Schuldschein debt market. Packaging maker Crown Holdings, Inc. became the first junk-rated US borrower to do such a deal in 2019, and there were debut loans in China, Russia and Japan.

ESG is “definitively an important topic for most investment grade borrowers in Western Europe, and it’s starting to be one for cross-over companies and for some emerging-markets clients,” said Laurent Vignon, head of EMEA loan syndicate at Societe Generale SA. — Bloomberg

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