Environmental Social Governance

Relentless growth in green bonds

Even the coronavirus crisis cannot stop the boom in the green bond market. On the contrary, investors are increasingly paying attention to environmental, social and corporate governance risks. By mid-October 2020, more than EUR 170bn in green bonds had already been issued worldwide. In addition, more than 200 new sustainable funds were launched in Europe in the first half of 2020 alone. We expect a new record for 2020 as a whole.

Green bonds on the rise

Climate change is playing an increasingly important role in the bond market. There is a global emissions boom in bonds to finance climate-friendly projects: in 2019 alone, the volume rose by over 50%. The most relevant information on green bonds and current market trends can be found in our latest special report.

Fewer fossil fuels is way to go

Once the turmoil caused by COVID-19 subsides, there will be a need for reflection and strategic decisions on how to move forward and be prepared for the next challenges. The vast majority of EU member countries opted to push the Green Deal, together with the Digitalization Initiative, as the core of the new Recovery Plan for Europe. Going green would mean for CEE a further lowering of CO2 emissions and air pollution via a substantial reduction of coal-fired energy production (especially in Poland), utilization of EU funds and green financing to smooth the transition, getting more involved in renewables and reducing energy intensity.

ESG topics in Credit Markets Weekly

European banks on the upswing

The COVID-19 situation is currently easing throughout Europe. This favors a rapid economic recovery. The upturn currently emerging is also likely to continue in the long term. This is presently benefiting the tourism industry, among others, and European banks in particular - including BNP Paribas and UniCredit, for example, but also Ryanair.

Cyclical upswing continues

The cyclical consumer goods sector has improved significantly in recent weeks as a result of the improvement in the Covid-19 situation in Europe. McDonalds, for example, is benefiting from this - the fast food giant should again achieve significant increases in sales and net profit in the current fiscal year.

Rio Tinto, the world's leading aluminum producer, is also currently sitting on the bright side, benefiting from strong demand for metals and iron ore, due to the global economic upturn.

Companies get ESG profile

The topic of sustainability is becoming increasingly relevant for companies and their valuations. Therefore, from now on, we will also publish the environmental, social and governance classifications of companies in the global stock recommendation list. A quantitative ESG profile objectively shows whether a company performs better, average or worse in each of the three factors compared to the global sector.

Sustainable corporate bonds are booming

The topic of sustainability is receiving increased attention in the credit market, fueled by post-Corona growth potential, but also by EU regulation. Just recently, several banks announced their exit from coal financing, issuers are increasingly adding ESG features to their placements, and investors are showing greater interest in sustainable alternatives. Compared to last year, the share of ESG-related issues in the primary market for EUR-denominated corporate bonds even doubled this year, from 8% to 16%.

ESG regulation: More transparency through disclosure requirements

Favorable refinancing conditions remain a stated goal of the ECB. A warning shot from the central bank has halted the rise in yields. Meanwhile, EU regulation aims for more sustainability. This also applies to the financial industry, which is acting as a catalyst in both investment and lending. This week, for example, the European Banking Authority published a new consultation proposal on technical standards for ESG risk disclosure by financial institutions. Further recommendations were also published by ESMA during the week. These and other guidelines will ensure greater ESG transparency in the future.

Banks largely Corona-resistant so far

The annual results published by European banks to date show a thoroughly expected trend: In most cases, only slight declines in earnings can be discerned, which have been partly offset by targeted cost management. Bank balance sheets reflected the significant increase in risk provisions on the one hand, but also government aid measures for companies on the other. Both the non-performing loan ratios and capital ratios remained largely stable.

Credit markets also benefit from Draghi bonus

Former ECB President Mario Draghi, who has been tasked with forming a government in Italy, is currently holding intensive exploratory talks and is probably seeking a broad political consensus. The credit market was optimistic in advance: risk premiums are trending downward to sideways across all asset classes. However, if Draghi's plan fails, spreads could rise again to the level seen before his mandate.

Slight nervousness on credit market

A certain degree of uncertainty can currently be felt on the capital markets. Although credit spreads for all asset classes have been moving in a narrow range since the beginning of the year, slight nervousness is noticeable. In addition to the political crisis in Italy, we see the delivery delays of COVID-19 vaccines as a reason for this, which could delay the vaccination plans of the EU countries and thus the gradual easing of containment measures. Meanwhile, financing conditions on the capital markets remain very favorable.

How is the credit market starting the new year?

In 2021, the credit market should develop similarly to 2020, thanks to the continued support of the ECB. Both SSA and corporate bond issuers should again demonstrate very strong momentum on the primary market with comparable volumes. In the covered bond segment, issuance activity will remain subdued. In the case of senior bank bonds, a deterioration in credit quality could have a dampening effect; on the other hand, rising demand for credit may increase banks' refinancing needs. We expect issuance volumes to remain at the 2020 level.

Vaccine hope on the credit market

In view of the positive developments in the vaccine research against COVID-19, the downward trend in corporate credit spreads continued. The financials & covered bonds primary market has slowed down somewhat. On the secondary market, the positive trend of the previous week continued. The SSA primary market offers ample supply at mid-month. SSA secondary market premiums, which are in a declining trend, are largely stable.

Credit markets: Numerous ratings have changed

In recent weeks, we have seen various rating actions by the agencies. Among Western European issuers, around a dozen or so Fallen Angels have been counted since the beginning of the year; these are former investment grade companies that have been downgraded to the high-yield segment. The failure rate of European high-yield companies is expected to rise from 2.0% in April 2020 to 7.8% in April 2021. The peak at 8.1% is expected in the first quarter of 2021.

Credit markets wait for data foundation

At present, the credit market has not yet developed a uniform thrust. The primary market for EUR-denominated bank bonds is lagging behind other asset classes. On the secondary market, a volatile sideways movement of risk premiums is currently forming. In addition to the current reporting season for the first quarter, the first publications of GDP data have shed some light on the uncertain economic situation.