Despite an increased focus on ESG, the ESG-related impact bond (labeled bond) issuances plummeted in 2023, according to a new report by SBICAPS. These bonds, a key tool for financing environmentally beneficial projects, experienced a significant decline compared to their peak in 2021.

Higher interest rates, a global economic slowdown, and rising costs are cited as the primary reasons for the drop. Concerns about “greenwashing,” where companies exaggerate their environmental credentials, may have further dampened investor confidence, the report said.

A category-wise analysis shows that green bond issuances maintained a stable position in CY23, remaining unchanged from the previous year, following a significant decrease in CY22, despite concerns about greenwashing. This highlights the climate considerations in the ESG landscape, the report said.

Interestingly, sustainability-linked bonds experienced a considerable decline. Despite having weathered challenges in CY22 it decreased by half in CY23. This can be attributed to the heightened scrutiny investors now demand from corporations. Green investors seek transparency regarding the ultimate use of funds and are unwilling to accept mere corporate assurances. The report indicated that social and sustainability bonds experienced modest declines on a year-on-year basis.

However, the report is cautiously optimistic about CY2024. A key factor driving this outlook is the continued dominance of climate change within the ESG landscape. The report points to several factors that could spur a green bond revival next year such as a potential decrease in interest rates, an increased role for the private sector in green financing and more governments issuing labelled bonds.

Regulatory developments also supplement the future of green bonds. India has emerged as a global leader in regulating ESG rating agencies with SEBI’s introduction of the Business Responsibility and Sustainability Reporting (BRSR) framework that encourages transparency and discourages greenwashing practices. Similarly, Europe has implemented stricter regulations to combat greenwashing.

According to the report, despite 2023 witnessing a setback for green bonds, the underlying need for green financing remains immense. Increased investor scrutiny and stricter regulations, coupled with potential economic improvement, pave the way for a potential rebound in 2024, the report said.