The Capital Markets Union is not yet in sight, but there is broad consensus in the EU that Europe wants to remain a global leader in Sustainable Finance. The European market for ESG bonds is the largest globally and has seen significant growth in recent years. In the first six months of 2023 alone, the issuance volumes in this asset class increased by 18% to 206 billion euros, according to data from the Association for Financial Markets in Europe (AFME).

However, this is only one side of the coin. When looking at the overall European bond market, ESG securities are in decline. Their share of total issuances decreased from over 15% in 2021 to 12.7% in the first half of 2023. AFME attributes this to the significant increase in sovereign and non-sustainable bond issuances.

Among ESG bonds, Green Bonds have become a common investment class. The high premiums for green bonds on the secondary market are a thing of the past. While the overall demand for bonds decreased due to changes in the interest rate environment, Green Bonds enjoyed comparatively robust demand. This resulted in a heightened correlation between green bonds and conventional bonds, particularly within the corporate bond sector. In the primary market, premiums of 5 to 10 basis points have reemerged. Market observers attribute this to the typically defensive nature of Green Bonds, which investors appreciate during times of economic uncertainty.

AFME emphasizes that the development of a deep market for ESG bonds is essential for the transition of the European economy. Within the sustainable bonds asset class, the majority consists of Green Bonds. The issuance volumes in this segment increased by 32% in the first six months. In total, 72% of the entire issuance volume of ESG bonds in the European Union consists of green securities.

Germany is the largest issuer of Green Bonds for the third consecutive time. German emissions amount to nearly 37 billion euros, with over a quarter attributed to two green federal bonds. In 2023, Cyprus and Slovenia made their debut in the green sovereign bond market. Thus, green bonds have been issued in every EU country except Malta and Bulgaria.

Nevertheless, the issuance activity for the European Union's Nextgen program has fallen behind expectations. Of the originally targeted Green Bond issuances of up to 250 billion euros by 2026, only 45 billion euros have been realized so far.

Additionally, the issuance activity within the European Recovery Plan has declined. In 2022, 22.2 billion euros were raised with green bonds, compared to only 7.7 billion euros in the current year. "The share of green bonds in the total Nextgen issuances of the EU is currently 15%, only half of what was originally announced," writes Commerzbank analyst Stephan Kippe in a recently published sector analysis.

The emission activity on the overall market for government and SSA bonds (Supranational, Sub-Sovereigns, Agency) in the current year has followed a pattern similar to that of 2022. The credit analyst attributes the shortfall in EU Green Bond emissions to a lack of suitable investment projects. He anticipates a "certain catch-up process" for EU Green Bonds in the coming year.

According to the Commerzbank analyst, the outlook for green bonds in the corporate bond market is less optimistic. He believes that an increase in the market share of green emissions next year is not to be expected. Here, too, there is a lack of viable investment projects in view of the rise in financing costs due to inflation, increasing regulatory requirements and higher interest rates, as well as companies' reluctance to invest due to the economic situation.

The segment of Social Bonds has presented itself weak to underdeveloped in the current year. This is not only in relation to the overall market but also in absolute numbers. Based on AFME data, the issuance activity decreased by 8% in the first six months of the year. Since the completion of the Sure program by the European Commission for the refinancing of short-time work in the member states during the Covid-19 crisis in 2021, there have been no more socially declared bond emissions by state issuers, notes the association.

This is not due to a lack of demand. The issuances of the 100 billion euro Sure program were oversubscribed by multiples. But after the end of the pandemic-induced state of emergency and in view of the unequal distribution within the EU, doubts quickly arose about the European Commission's Social Bond programs. Both the Fiscal Committee and the European Court of Auditors recently pointed out that the collectively covered favorable refinancing could drive southern European member states into debt.

For the coming year, Commerzbank analyst Kippe predicts a further decline in Social Bond issuances. He cites the planned cuts to the Caisse d'Amortissement de la Dette Sociale (Cades) as the reason. Cades manages liabilities of the French social insurance and is one of the largest Social Bond issuers.