The first quarter of 2022 saw a drop in global sustainable bond issuance compared to the same period last year, primarily as a result of the Ukraine crisis, which heightened market volatility.
The escalation of the conflict in Ukraine is also adding to inflationary pressures, which will likely hamper new renewable energy projects. Social bonds, which seek to fund projects with socially beneficial outcomes such as affordable housing, also fell in volume – by about 7% compared to last year.
In Q1, the economic outlook for emerging markets was weak, as geopolitical tensions heightened. The Russian invasion of Ukraine has put a major dent in global energy supplies and has led to a steep fall in emerging market equities. The escalation of the conflict in Ukraine has also triggered a sell-off in emerging market ETFs, causing investors to question whether their investments will continue to deliver the expected growth.
While the country continues to struggle, the situation looks rosy for Europe’s domestic market. France has had stable credit quality for over 18 months, but by 2022, it expects a rebound in its economy. However, prudent spending plans are necessary to restore its pre-pandemic budgetary position. Meanwhile, in the United States, the electric utility sector has made huge strides in cutting carbon emissions and delivering reliable service, while still meeting consumer demands. Moreover, utilities will have to mitigate the intermittency of renewable resources. Furthermore, the utilities must identify economic solutions to mitigate spatial requirements.
Another concern for the euro zone is the potential impact on the euro area economy. Russia’s invasion of Ukraine could hit the euro zone economy harder and cause more pain. The escalation in the Ukraine crisis could also dampen the deleveraging and growth prospects for the euro zone economies, which heavily rely on Russian energy. However, despite the growing risk of a major crisis, these factors are influencing the global sustainable bond issuance.
In a minimum economic impact scenario, the war in Ukraine could lead to hostilities ending mid-year, the Russian energy supply will be maintained, oil prices stabilize at around $100/bbl, and European natural gas prices will return to under EUR100 per megawatt hour. These initial spikes in prices have been partially reversed, according to a recent report by Thomson Reuters.
As Ukraine becomes increasingly uncontrollable, investors have sought other measures of economic growth. The swaps market is less distorted by ECB purchases and captures the entire eurozone. With this, investors are seeking alternative measures that can help them predict future economic conditions. In the short run, the EU’s bond market may provide a better alternative to U.S. rates.
Post-pandemic challenges continue to limit growth in many EM countries. However, most have re-established their pre-pandemic levels. In most cases, negative ratings bias has decreased, and recent virus outbreaks have not been as devastating to the economies in the key EMs. Some auto makers have also begun suspending their links with Russia due to the crisis. These developments will inevitably have an impact on their credit trends.