Sustainable bond issuance outperformed the broader market in the second quarter of 2022, reaching a record 15% of global total issuance, according to a new report from Moody’s ESG Solutions.

While market headwinds continued to pressure issuance volumes for green, social, sustainability and sustainability-linked (GSSS) bonds, which declined 21% in the first half of the year to $447 billion, the performance was ahead of the 26% decline for overall global bond volumes. Q2 sustainable bond volumes of $225 billion increased 2% compared to Q1, marking the first quarterly increase in over a year.

According to Matthew Kuchtyak, Vice President – Sustainable Finance at Moody’s ESG Solutions, the data indicates that the sustainable bond market is proving resilient, “suggesting that the trend of issuers linking their capital market financing activities with their sustainability objectives will persist.”

Moody’s maintained its forecast for stronger GSSS volumes in the second half of the year, and its $1 trillion full year estimate.

Green bonds were the primary driver of the quarter-over-quarter GSSS bond recovery, growing 28% in the quarter to $136 billion, and roughly flat over the prior year quarter. The green bond rebound was particularly pronounced in Europe, with volumes by European issuers climbing by over 82% over Q1 to reach $87 billion in the quarter, and accounting for 64% of the global total. Moody’s expects continued improvement in green bond volumes in the second half of the year, with a full-year issuance forecast of $550 million, similar to 2021 levels.

Volumes for both social, at $34 billion, and sustainability bonds, at $35 billion, continued to decline, falling 40% and 36% year-over-year, respectively. While Moody’s expects social bond volumes to continue to remain muted as pandemic-related programs wind down, sustainability bond issuance is anticipated to rebound, driven by “issuers seeking to highlight both their environmental and social objectives.”

While sustainability-linked bond (SLB) volumes of $20 billion declined 31% from the first quarter, first half issuances for SLBs at $47 billion remain more than 20% higher than H1 2021 levels. Moody’s expects SLB volumes to resume growth in the second half of the year, as “SLBs continue to emerge as an instrument of choice for many issuers aiming to tap the sustainable bond markets while maintaining the flexibility of general corporate purposes borrowing.”

The report also highlighted some of the major market and regulatory developments likely to affect the sustainable bond market going forward, including the recent classification of some nuclear and gas activities as eligible under the EU Taxonomy, which may lead to a growing share of nuclear-related green bond issues, such as recent deals by Ontario Power Generation and Bruce Power. Other significant events included the recent U.S. Supreme Court ruling limiting the federal government’s ability to regulate emissions from power plants, which risks delaying the U.S. energy transition, and the recent announcement by the European Central Bank (ECB) that it will tilt its bond holdings towards issuers with better climate profiles, which could boost sustainable bond volumes over time.