Issuances of green, social, sustainability and sustainability-linked (GSSS) bonds are expected to be flat at roughly $1 trillion in 2022, according to a new report by Moody’s ESG Solutions, ending a multi-year run of rapid growth. With market and geopolitical pressures driving a 28% decline in global sustainable bond volume in Q1 2022, Moody’s ESG has cut is forecast for the year by over 25% from its prior $1.35 trillion estimate.

Moody’s ESG had already anticipated GSSS growth rates slowing due to the market maturing and tightening monetary policy affecting the larger bond market, although the Russian invasion of Ukraine significantly intensified these pressures, impairing global growth prospects, exacerbating inflationary forces, and raising prospects for accelerated monetary policy tightening.

While the Russian invasion appears to have disrupted the GSSS market near-term, however, Moody’s also cites the war as one of its long-term tailwinds, as the resulting urgency for energy security around the world is expected to accelerate demand for renewable energy capacity.

The report also highlights several other factors expected to drive a resumption in GSSS market growth, including the need for climate mitigation and adaptation financing, accelerated decarbonization efforts to achieve net zero goals, and growing regulatory attention on sustainability.

By instrument, green bond issuance fell nearly 30% year-over-year in the first quarter, to $104 billion, hitting the lowest level since Q4 2020. Green bond volumes were particularly hard hit in Europe, where issuance declined 37%. For the year, Moody’s is forecasting green bond issuance to be roughly flat relative to last year, at $550 billion, well below its prior $775 billion estimate.

Social bond volumes saw the largest percentage decline, falling by 62% compared to the prior year quarter. Social bond issuance had already been expected to fall, driven by the wind-down of pandemic relief, and as sustainability bonds, which incorporate both environmental and social project financing, gain in relative popularity. For the year, Moody’s sees social bond issuance falling 39% to $125 billion, compared to its prior $150 billion forecast.

Sustainability bond volumes fell 29% year-over-year, impacted by broader market forces, as well as a decline in pandemic relief. Moody’s anticipates a relatively modest decline of 8% for the full year to $175 billion, compared to its prior estimate of $225 billion.

Sustainability-linked bonds (SLBs) are the only sector still expected to show growth this year, with Moody’s forecasting SLB issuance to reach $150 billion in 2022, up significantly from around $90 billion last year, but lower than the prior $200 billion forecast. The SLB market has been the fastest growing GSSS sector for several quarters, as issuers increasingly look to tie general corporate purpose financing to ESG performance goals. For the quarter, SLB volumes reached $26 billion, roughly 3x Q1 2021 levels.

Matthew Kuchtyak, Vice President – ESG Outreach & Research at Moody’s ESG Solutions, said:

“Market conditions will provide greater than anticipated headwinds for sustainable bond issuance this year. As a result, we now anticipate sustainable bond volumes will be roughly flat compared to last year’s total, with around $1 trillion of issuance for the whole of 2022.”