Fixed income outlook 2024: Blue, orange and social bonds to have their moment in predicted record year

Issuance could surpass previous highs as market conditions and increased variety make sustainable bonds appeal in 2024.

2024 is predicted to be a bumper year for sustainable fixed income with record levels of issuance and increased variety as we see more capital backing for social impact and blue bonds, and increased interest in ‘orange bonds’.

With more sectors looking at green and social bonds to raise key capital, and as the market conditions continue to favour fixed income, fund managers have predicted a year of growth for sustainable fixed income when ESG Clarity asked about their outlooks for 2024.

“If the current market consensus that global inflation will continue to abate proves prescient, interest rates could be pulled lower and potentially set 2024 up as a record year for the issuance of green, social and sustainability (GSS) bonds,” said Stephen Liberatore (pictured left), head of ESG/impact – global fixed income at Nuveen.

“In the absence of a widespread recession, 2024 could present a strong opportunity to exceed the approximately $925m and $950m issued in 2022 and 2023, respectively, with the record approximately $1.1trn, (according to the Environmental Finance’s Green Bond Database) issued in 2021 also potentially being surpassed.”

Wider recognition and understanding of the role of the green, social and sustainability bond market will also play a part in growth, said Ana Victoria Quaas, investment director at Fidelity International.

“Governments, regulatory bodies and corporates worldwide are acknowledging the importance of sustainable finance and implementing policies to encourage the issuance of these bonds. This support and recognition creates a favourable environment for the expansion of green, social, sustainable and impact bonds.”

Green bonds will continue to lead the market, predicted Nuveen’s Liberatore, after comprising around 60% of issuance last year.

“This dominance has been driven by the critical need to transition to lower carbon power generation and broad market acceptance of the relevant impact metrics,” he said.

Breadth and depth of social issuance grows

However, investors will also see expansion in social bond issuance too, added Columbia Threadneedle’s Tammie Tang (pictured left), senior portfolio manager within the fixed income team, something that is much-needed to address the world’s multitude of social issues.

“We have seen improvement in the prevalence and awareness of social issues,” she said.

“Encouragingly, the spectrum of outcomes is also wide from housing, healthcare, education, employment and community integration as well as access to infrastructure.

“The social bond market has come a long way, with the breadth and depth of issuance growing hugely over the past five-plus years – but there is still much to do in 2024.

“As an industry, we have a key role in moving forward towards informing and educating how the spectrum of issuers can raise their capital in more targeted and socially impactful ways. Specifically, through education around how the greater targeting of social outcomes and the greater targeting of more vulnerable populations can deliver more impactful capital.”

Empowering women with orange bonds

After slowing post-Covid, Liberatore agreed social bonds “will return with greater interest given the ongoing recognition of the global housing crisis” and also pointed to the emergence of ‘orange bonds’ investing in gender lens opportunities.

Last year the world’s first orange bond was issued by the Impact Investment Exchange – the $50m four-year 6.5% Women’s Livelihood Bond 5, backed by ANZ, Barclays and Standard Chartered. The issuer also invited companies to sign up to its Orange Bond Pledge, which aims to unlock $10bn by 2040 to empower 100 million women worldwide.

Columbia Threadneedle’s Tang also highlighted a social inclusion gender bond issued by the Asia Development Bank in 2022 as an example of this growing trend – it has raised $2.9bn since then.

“These bonds focus on programmes, projects, investments and loans in gender equality and women’s empowerment,” she said. “The goal is to mainstream gender equality, develop gender targets across employment, increase economic participation, improve social protection and health programs, and support prevention of and response to gender-based violence. These programmes also recognise the vulnerability of women in climate shocks, as well as the important role women need to play in climate adaptation and in resilience strategies that deal with disaster and climate-related shocks and stresses.”

The market has seen further gender bonds, specific geography targeting bonds, healthcare and education bonds issued in the market by various issuers.

“This continued innovation in the bond market is a positive indicator of further thought as to how financial instruments can produce solutions to real world issues.”

Vital role of oceans

Moving around the colour spectrum from orange to blue, the fund managers also noted an increased interest in bonds supporting biodiversity and specifically the ocean.

Fidelity’s Quaas (pictured left) commented: “There are two areas where we expect increased focus: ocean and freshwater health, and climate resilience and adaptation. The vital role of oceans and freshwater ecosystems in maintaining biodiversity, regulating global climate patterns, and supporting long-term economic growth and resilience is gaining recognition. The publication of the blue bond guidance in September 2023 should help encourage the issuance of labelled bonds focused on the blue economy.

Nuveen’s Liberatore added an increasing number of environmental projects will also be funded through the expansion of debt-for-nature swaps, which have primarily been focused on marine projects, and also noted how this will lead to further growth in the blue bond space “given the importance of ocean health to the world”. 

Sustainable fixed income markets are clearly evolving with more variations in the sectors and different focuses for impact – whether that is gender, the sea or housing.

But there is also an increase in regional issuance, Quaas said.

“One area that could experience significant growth in labelled bond issuance is emerging markets,” she explained. “These markets are actively seeking ways to bridge the funding gap associated with climate change, biodiversity loss and social issues, attracting both investor and government attention.

“As these markets prioritise sustainable development, the issuance of labelled bonds is expected to rise.”