CROSS-SECTOR

SECTOR IN-DEPTH
31 January 2023

TABLE OF CONTENTS
Sustainable bond issuance to reboundin 2023, but return to peak volumes
unlikely2
Sharper focus on implementationof corporate decarbonizationcommitments to acceleratetransition-related issuance
8
Greater market scrutiny andheightened greenwashing fears may
dampen near-term growth, especiallyfor SLBs
9
Public sector issuers, especially inemerging markets, will continue toexpand the sustainable bond market
and diversify use of proceeds
10Appendix
13
Moody’s related publications
14

Contacts
Matthew Kuchtyak+1.212.553.6930
VP-Sustainable Financematthew.kuchtyak@moodys.com
Erika Bruce+1.212.553.4341
Associate Analyst
erika.bruce@moodys.com
Adriana Cruz Felix+33.1.5582.3261
VP-Sustainable Financeadriana.cruzfelix@moodys.com
Jeffrey Lee+65.6499.0485
VP-Sustainable Financesukjoonjeffrey.lee@moodys.com
Tobias Lindbergh+33.1.5582.3273
SVP-Sustainable Financetobias.lindbergh@moodys.com
Rahul Ghosh+44.20.7772.1059
MD-Sustainable Finance
rahul.ghosh@moodys.com

Sustainable Finance – Global

Sustainable bond issuance to rebound 10%
in 2023 to $950 billion, short of record high» Sustainable bond issuance to rebound in 2023, but return to peak volumes
unlikely. We forecast that global issuance of green, social, sustainability andsustainability-linked (GSSS or sustainable) bonds will total around $950 billion this year –up 10% from an estimated $862 billion in 2022, but below the record volumes of $1.05
trillion recorded in 2021. Challenging macroeconomic and market conditions and greater
scrutiny over perceived greenwashing will temper the overall pace of recovery.
» Sharper focus on implementation of corporate decarbonization commitments toaccelerate transition-related issuance. Companies in sectors with heightened inherent
exposure to carbon transition risk will face growing pressure this year to follow throughwith credible implementation plans. Strengthening policy support for green capitalspending in many countries, such as the Inflation Reduction Act (IRA) in the US, will also
drive clean energy investments. As more issuers aim to finance their net-zero ambitions
and transform their business strategies to adapt to rising policy and market risks, labeledsustainable bond issuance from companies in sectors highly exposed to carbon transitionis likely to rise this year.
» Greater market scrutiny and heightened greenwashing fears may dampen nearterm growth, especially for sustainability-linked bonds. Prospective issuers ofsustainable bonds may be reluctant to enter a market where increased scrutiny could
expose them to reputational damage, potentially constraining growth in the market
over the next year. This is especially a challenge for the SLB market, where issuancefell significantly in the second half of last year as investors increasingly scrutinized therelevance, ambition and rigor of issuers' targets and financial penalties. Nevertheless, we
expect standardization of best practices to safeguard the long-term rigor and credibility ofthe market.
» Public sector issuers, especially in emerging markets, will continue to expand
the sustainable bond market and diversify use of proceeds. Public sector issuers
will remain of critical importance to the sustainable bond markets in 2023 and beyond.
Cross-border collaboration took center stage at the 2022 United Nations Climate Change
Conference (COP27) as energy security, climate adaptation, blended finance and justtransition rose up the agenda. These themes have potential to continue expansion ofsustainable bond issuance from sovereign and sub-sovereign issuers, not only supporting
growth in volumes but also diversifying the use of proceeds of labeled bonds.

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Sustainable bond issuance to rebound in 2023, but return to peak volumes unlikely
The continued maturation and diversification of the global green, social, sustainability and sustainability-linked (GSSS or sustainable)bond markets will support a modest rebound in issuance in 2023, even as rising interest rates and macroeconomic uncertainty keep
broader bond volumes well short of record highs in 2020 and 2021. We forecast that global issuance of sustainable bonds will totalaround $950 billion this year, up 10% from an estimated $862 billion in 2022 (see Exhibit 1). Our 2023 projection comprises $550
billion of green bonds, $150 billion of social bonds, $175 billion of sustainability bonds and $75 billion of sustainability-linked bonds(SLBs). We expect growth to resume for each type of sustainable bond label except for social bonds, which will likely decline modestly
from 2022 volumes now that pandemic-related financing has largely receded.
Exhibit 1

Sustainable bond volumes to rebound to $950 billion in 2023 but trail record volumes
Annual global sustainable bond issuance by label
Green bonds

Social bonds

Sustainability bonds

Sustainability-linked bonds$1,200

Annual issuance ($ billions)$1,000
$75

$800

$175

$600

$150

$400
$550
$200

$2016

2017

2018

2019

2020

2021

2022

2023F

Sources: Moody's Investors Service and Environmental Finance Data

GSSS bond volumes contracted to $862 billion in 2022, about an 18% decline from the record-setting $1.05 trillion issued in 2021 andthe first drop in annual volume since 2011. This came against the backdrop of a volatile market environment, where rising rates andmacroeconomic and geopolitical uncertainty contributed to a dramatic year-over-year decline of around 27% in global bond volumes,
according to data from Dealogic. The less severe decline in sustainable bonds reflects the relative stickiness of this segment and thecontinued reorientation of the capital markets toward ESG and sustainability considerations.
A number of drivers and constraints will influence the trajectory of sustainable bond issuance in 2023 (see Exhibit 2). While some ofthese fundamental issuance drivers – such as the rise of transition finance, government financing of sustainable development andgrowing awareness of the interconnectedness of environmental and social factors – have underpinned sustainable bond issuance inrecent years, we believe these trends will accelerate in 2023. Other emerging areas, such as growing pressure on issuers to enhancetheir sustainability disclosures and heightened focus on the role of blended finance in the wake of COP27, will complement these more
long-standing forces.
Notwithstanding these fundamental long-term drivers, there are also some key constraints on market growth that will likely keep
volumes below 2021 record highs. Macroeconomic uncertainty and rising interest rates will continue to suppress broader debt issuancethis year, while heightened market scrutiny on quality and potential greenwashing may cause some issuers to pause plans to enter themarket. Issuers are also navigating an increasingly complex ESG regulatory and political landscape, which may lead some issuers with
global operations to consider pausing plans to issue labeled debt instruments until they gain greater clarity on how to best articulate
their sustainability objectives.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for themost updated credit rating action information and rating history.

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Exhibit 2

Sustainable bond market drivers and constraints in 2023

Source: Moody's Investors Service

While these drivers and constraints lead to a mixed story with respect to 2023 issuance, what remains clear is the long-term
penetration and influence of sustainability in the capital markets. Sustainable bond volumes continue to reach new highs in terms of
their share of the broader bond market, with a record 13% of global bonds being labeled as sustainable in 2022. Despite sustainablebond volumes totaling a two-year quarterly low of $170 billion in the fourth quarter, the share of market was still 14%, the thirdhighest quarterly share on record (see Exhibit 3). This represented a modest decline from the record quarterly high of 16% achievedin both the second and third quarters of 2022. We anticipate that sustainable bonds will reach an approximate 15% share of full-year
global issuance in 2023 as market penetration deepens.
Exhibit 3

Issuance declined sharply in the fourth quarter of 2022 but share of market has been on an upward trajectory
Quarterly sustainable bond issuance by label and share of global bond market
Green bonds

Social bonds

Sustainability bonds

Sustainability-linked bonds% market share (right-hand axis)

$350

18%
16%

Quarterly issuance ($ billions)

$300

14%
$250
12%
$200

10%

$150

8%
6%

$100
4%
$50

2%

$-

0%
Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Sources: Moody's Investors Service, Environmental Finance Data and Dealogic

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European issuers will continue to account for a dominant share of global GSSS bond supply in 2023, reflecting the ongoingcommitment of the region to finance green and social activities. Despite acute challenges in the European bond market in the firstquarter of last year following Russia's invasion of Ukraine, European issuers accounted for $392 billion in issuance in 2022, representing
46% of global volumes (see Exhibit 4). Asia-Pacific volumes totaled $205 billion last year (24% of global issuance), followed by North
American issuers with $127 billion (15% of global issuance) and supranational issuers with $101 billion (12% of global issuance). Latin
American issuers brought just $26 billion of sustainable bonds to market in 2022 (3% of global issuance), representing a 47% decline
from 2021 volumes, while Middle East and African issuers brought $11 billion (1% of global issuance) to market, just below the $12
billion issued in 2021.
Global issuance of sustainable bonds remains diverse from a sectoral perspective, with nonfinancial companies representing about onethird of issuance in 2022, followed by financial institutions with 22% and government agencies with 17% (see Exhibit 5). Although
corporate issuers accounted for the largest share by sector, issuance fell to $288 billion last year from a record $391 billion in 2021.
Sovereign issuance also pulled back from an all-time high of $188 billion in 2021 to $115 billion last year. Both of these trends appear
to be attributable to a decline in average transaction size, with average sovereign transaction size decreasing by 36% and average
corporate transaction size decreasing by 25%.
Exhibit 4

Exhibit 5

European issuers have held a resilient leading share of GSSS bondvolumes in recent years

Share of 2022 global GSSS bond issuance by issuer type

EuropeMiddle East & Africa

Asia PacificNorth America

Latin America
Supranational

Supranational
8%

Share of Annual GSSS Issuance (%)

100%

Agency17%

Sovereign
13%

90%

80%
70%
Municipal
6%

60%
50%

40%
Corporate
34%

30%

20%

Financial
Institution
22%

10%

0%
2016

2017

2018

2019

2020

Sources: Moody’s Investors Service and Environmental Finance Data

2021

2022

Sources: Moody’s Investors Service and Environmental Finance Data

Green bond issuance to rebound to $550 billion in 2023 as leading driver of GSSS volumes
Issuance of green bonds totaled $482 billion in 2022, declining by about 13% from the record $555 billion issued in 2021, but still
well above the approximately $299 billion issued in 2020 (see Exhibit 6). Steady growth in global issuance is likely to return in 2023
as an increasing number of issuers seek to finance net-zero implementation strategies and issuers explore increasingly diverse uses ofproceeds, including water, adaptation, nature and biodiversity projects in addition to climate mitigation. As a result, we anticipate thatgreen bond issuance will be around $550 billion globally in 2023, which would represent about 14% growth from 2022.
European issuers continued to dominate green bond issuance in 2022, with $244 billion accounting for 51% of the global total. We
expect this trend will continue in 2023, despite a modest decrease in share from 53% in 2021. Asia-Pacific and North American issuers
followed with volumes reaching $117 billion and $70 billion last year, respectively.
From a sectoral standpoint, green bond issuance was still led by nonfinancial companies in 2022, with $174 billion in issuanceaccounting for around 36% of global green bond volumes (see Exhibit 7). This represented a decline from the sector’s high of $239
billion in 2021. Financial institutions, on the other hand, saw issuance climb to $135 billion in 2022 as they increased their share ofmarket to 28% from 19% a year earlier. Notable green bond issuances in 2022 included the debut offering from General Motors
Company (Baa3 stable) with a $2.25 billion dual-tranche issuance in August, indicative of the strong potential for labeled bonds fromthe automotive sector as carmakers ramp up investment in electric vehicles.

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Exhibit 6

Exhibit 7

European issuers continued to lead green bond volumes in 2022

Share of 2022 global green bond issuance by issuer type

Asia PacificMiddle East & Africa

EuropeNorth America

Latin America
Supranational

Supranational
4%

$600

Agency9%

Sovereign18%

Annual issuance ($ billions)

$500

$400

Municipal
5%

Corporate
36%

$300

$200

$100

Financial
Institution
28%

$2016

2017

2018

2019

2020

2021

2022

Sources: Moody’s Investors Service and Environmental Finance Data

Sources: Moody’s Investors Service and Environmental Finance Data

Social bond volumes to decline to $150 billion as the largest issuers continue to reduce their pandemic-related financings
Global social bond issuance fell to $163 billion in 2022, about a 22% decline from $209 billion in 2021 (see Exhibit 8). We expect social
bond volumes to fall again to $150 billion in 2023, which would represent around an 8% decline from last year. While this would still
represent a significant increase over pre-pandemic volumes, we expect the issuance of standalone social bonds to remain constrainedby the lack of sizable social projects, especially now that pandemic-related financings are largely in the rear view mirror. Although
the market will continue to prioritize social issues in 2023, as challenges such as access and affordability rise to the fore, this may
not immediately translate into significant dedicated social bond issuance. While not our core scenario, a deeper and more protracted
economic downturn this year would likely lead to greater counter-cyclical government spending that could provide support to social
bond activity.
Social bonds were heavily concentrated in the agency sector in 2022 (see Exhibit 9), with one issuer – the French public finance agency
Caisse d'Amortissement de la Dette Sociale (CADES) (Aa2 stable) – accounting for nearly $40 billion of issuance last year. We believesocial bond volumes may diversify somewhat in 2023, although they will remain more concentrated than the green bond market.
Regionally, European and Asia-Pacific issuers accounted for leading shares of issuance last year, at 38% and 33%, respectively. From a
sectoral perspective, a majority of social bonds were issued by the public sector in 2022, with sovereigns, supranational and agencies
representing 65% of the total.
Exhibit 8

Exhibit 9Social bond volume pulled back in 2022 as pandemic-related
issuance fell

Share of 2022 global social bond issuance by issuer type

Asia PacificMiddle East & Africa

EuropeNorth America

Latin America
Supranational

Sovereign
6%

Annual issuance ($ billions)$250

Supranational
5%

Municipal
9%$200

Corporate
10%

$150

Agency
54%

$100

$50

Financial
Institution
16%

$2016

2017

2018

2019

2020

Sources: Moody’s Investors Service and Environmental Finance Data

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2021

2022

Sources: Moody’s Investors Service and Environmental Finance Data

Sustainable Finance – Global: Sustainable bond issuance to rebound 10% in 2023 to $950 billion, short of record high

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Sustainability bonds to climb to $175 billion in 2023 with increased interplay between green and social objectives
Sustainability bond volumes declined in 2022 to $144 billion, down by about 24% from the record $190 billion issued in 2021 (seeExhibit 10). But we expect issuance to rebound in 2023, amid a rise in broader issuance volumes and growing market attention
on the interplay of environmental and social considerations. The heightened focus on social issues will also have an impact on thesustainability bond segment, where issuers are increasingly aiming to tie together green and social objectives in combined use-ofproceeds structures. As a result, we forecast about a 21% increase in sustainability bond issuance this year to $175 billion.
Supranational and European issuers had a leading share of issuance in 2022, with $43 billion and $40 billion, respectively. Asia-Pacificissuers followed closely with $29 billion in issuance, with nearly one-third of that from nonfinancial companies. North American issuersbrought $17 billion to market, followed by Latin American issuers with $13 billion and Middle East and African issuers with $2 billion.
Supranationals had a leading share of issuance among sectors (see Exhibit 11) with $43 billion (30% of global sustainability bondissuance), followed by nonfinancial companies with $34 billion (24%), financial institutions with $25 billion (17%) and sovereigns
with $15 billion (10%). Notable sovereign sustainability bonds in 2022 included the debut transactions from the Government ofPhilippines (Baa2 stable). Nonfinancial companies held a steady share of market in 2022 (24%), demonstrating these issuers’ continued
integration of both environmental and social projects into their financing strategies.
Exhibit 10

Exhibit 11

Global issuance of sustainability bonds remained regionally diverse
in 2022

Share of 2022 global sustainability bond issuance by issuer type

Asia PacificMiddle East & Africa

EuropeNorth America

Latin America
Supranational

Municipal
9%$200

Agency10%

Annual issuance ($ billions)

$180
$160

Supranational
30%

$140

Sovereign
10%

$120

$100
$80

$60
$40

Financial
Institution
17%

$20

Corporate
24%

$2016

2017

2018

2019

2020

Sources: Moody’s Investors Service and Environmental Finance Data

2021

2022

Sources: Moody’s Investors Service and Environmental Finance Data

Sustainability-linked bond volumes to remain subdued as label faces credibility challenges
Global SLB volumes totaled $72 billion for the whole of 2022, declining 23% from the record-setting $94 billion issued in 2021 (seeExhibit 12). Volumes were significantly lower in the second half of last year than the five previous quarters amid growing investor
scrutiny of the credibility and robustness of the key performance indicators (KPIs) and sustainability performance targets (SPTs)
embedded in SLBs. Another headwind last year was the dramatic decline in high-yield issuance, as non-investment-grade issuers havetended to be more active in the early days of the SLB market than in the use-of-proceeds markets. While we expect the still-nascent
SLB market to expand to $75 billion in 2023, growth is likely to remain subdued over the next year as the market matures and takes
time to establish accepted best practices.
The SLB market remains highly concentrated by region. European issuers accounted for $46 billion of issuance for 2022, accounting
for nearly two-thirds of the global market. Issuance volumes among North American, Latin American and Asia-Pacific issuers were all
similar last year at $10 billion, $8 billion and $7 billion, respectively. Middle East and African issuers brought $1 billion to market in2022, down from $6 billion in 2021.
The segment remained heavily concentrated among sectors, with nonfinancial companies representing 88% of issuance by volume
last year. Still, the segment became slightly more diverse from the prior year as sovereign and municipal issuers entered the market for
the first time. Chile (A2 stable) issued the inaugural sovereign SLB in the first quarter of 2022 with its KPIs linked to greenhouse gas

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emissions and renewable energy generation. Uruguay (Baa2 stable) followed with an issuance containing two KPIs, one linked to its
greenhouse gas emissions and another tied to a nature-related target. The instrument included a step-down coupon feature, a rarity
in the SLB market to date. Meanwhile, the Swedish city of Helsingborg became the first municipality to issue an SLB last year, with atarget to reach net-zero emissions by 2035 at the latest.
Exhibit 12

SLB volume fell sharply in the second half of 2022 amid greater market scrutiny
Quarterly sustainability-linked bond issuance by region
Asia Pacific

EuropeLatin America

Q1 2020

Q2 2020

Q3 2020

Middle East & Africa

North America$35

Quarterly issuance ($ billions)

$30
$25
$20

$15
$10
$5
$-

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Sources: Moody's Investors Service and Environmental Finance Data

Sustainability-linked loan volumes highlight broader market's resilience
Sustainability considerations are also playing a greater role in the loan market. A particular engine of growth is the sustainability-linked loan
(SLL) market, with volumes totaling $240 billion in 2022, according to Environmental Finance Data (see Exhibit 13). Modest growth of 7% in
2022 stood in contrast to the sustainable bonds market which saw an 18% decline last year. While these volumes likely overstate the actual
amount of debt outstanding – given that these volumes often reflect the full potential value of a revolving credit facility for some instruments– the significant rise in market attention is clear. Companies across the globe are increasingly replacing old loan facilities with new ones
linked to sustainability targets that can typically trigger an increase or decrease in interest rates based on whether these targets are achieved.
The linking of loan pricing to sustainability goals will continue as lenders aim to incentivize improvements in sustainability performanceand borrowers seek to highlight their sustainability goals while potentially lowering their borrowing costs. A prolonged period of subdued
conditions in public bond markets could also drive additional growth in SLLs as issuers seek to secure alternative financing sources.
Exhibit 13

Sustainability-linked loans reached a quarterly record high in the fourth quarter of 2022
Quarterly sustainability-linked loan issuance by region
Asia Pacific

EuropeLatin America

Middle East & Africa

North America$100

Quarterly issuance ($ billions)

$90
$80

$70
$60
$50
$40
$30
$20
$10
$Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Sources: Moody's Investors Service and Environmental Finance Data

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Sharper focus on implementation of corporate decarbonization commitments to accelerate transitionrelated issuance
As more issuers aim to finance their net-zero ambitions and transform their business strategies to adapt to growing policy and market
risks, labeled sustainable bonds from issuers in sectors highly exposed to carbon transition are likely to swell this year.
Carbon-intensive sectors face rising pressure from investors and asset managers to implement decarbonization strategies and makesignificant progress toward net-zero targets. In our most recent environmental risk heat map, we identified 16 sectors that are exposedto very high or high inherent exposure to carbon transition risk (see Exhibit 14). As these sectors take action to decarbonize theiroperations, they will need to secure funding to support capital expenditure in low-carbon projects, thus providing a boon for thesustainable bond markets.
Exhibit 14

Sixteen sectors have very high or high inherent exposure to carbon transition risk in our latest environmental heat map

Figures represent Moody's-rated debt in $ billions as of June 2022. See Moody's latest environmental heat map publication.
Source: Moody's Investors Service

In fact, labeled bond issuance from sectors with significant exposure to carbon transition risk has already been growing in recent years,
in line with the broader growth in sustainable bond volumes. In 2022, we estimate that sustainable bond issuance from sectors withheightened inherent exposure to carbon transition risk totaled $155 billion and accounted for about 18% of the total labeled bondmarket (see Exhibit 15). Although sustainable bonds from these sectors tend to account for about one-fifth of issuance, we expect
this share could grow as more issuers put their ambitious decarbonization strategies into action. To put this into context, sectors withelevated transition risk carried a total of $4.9 trillion of outstanding Moody's-rated debt as of June 2022.
Strengthening policy support for green capital spending in many countries, particularly in the US (Aaa stable) with the passage of theInflation Reduction Act (IRA), will also drive clean energy investments (see Inflation Reduction Act will build economic resilience, but its
costs and benefits vary by sector). Among the provisions in the IRA are tax incentives to spur significant investment in energy storage,
clean hydrogen and carbon capture and sequestration, including a 10-year extension of investment tax credits and production tax
credits. Such tax credits may make certain emerging technology investments more economically viable, thus resulting in a greater poolof projects that will likely support labeled bonds. In Europe, the REPowerEU plan may also spur additional sustainable bond issuance incoming years as the continent aims to finance projects to save energy, produce clean energy and diversify energy supply with the aimof ending the EU’s reliance on Russian fossil fuels.

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Another potential trend we expect is the use of different labels to finance decarbonization. Although the vast majority of labeledissuance from these sectors still comes in the form of green bonds (72% in 2022), there has been an uptick in other labels andstructures over the past two years, such as SLBs which accounted for $28 billion of issuance from these sectors last year. Although
SLBs have faced growing market scrutiny in recent months, first-time sustainable bond issuers with longer-term transition ambitions
may look to these structures as a transition financing vehicle, especially when they do not have a critical mass of eligible projects for abenchmark-sized use-of-proceeds issuance.
Exhibit 15

Sectors with very high or high inherent exposure to carbon transition risk accounted for nearly one-fifth of sustainable bond volumes in
2022
Green bonds

Social bonds

Sustainability bonds

Sustainability-linked bonds

Share of transition-related sectors as part of GSSS market (right-hand axis)

Annual issuance ($ billions)

$250

30%

25%

$200

20%

$150
15%
$100
10%

$50

5%

$-

0%
2016

2017

2018

2019

2020

2021

2022

Sources: Moody's Investors Service and Environmental Finance Data

While green bonds and SLBs will likely remain the largest drivers of transition-related finance in most markets, there is also potential
for the standalone transition label to find its feet in some jurisdictions. In Japan, the government's focus on green transition is themain driver of sustainable bond issuance, as illustrated by the Ministry of Economy, Trade and Industry's (METI) publication of the
Basic Guidelines on Climate Transition Finance in May 2021 and a sector-specific technology roadmap that supports climate transition
finance for nine hard-to-abate sectors in March 2022. This is further supported by METI's subsidies for third-party evaluations ofsustainable financing programs.

Greater market scrutiny and heightened greenwashing fears may dampen near-term growth,
especially for SLBs
As the sustainable debt market has matured, scrutiny from investors, regulators and other market participants is heightening
reputational risks for issuers claiming sustainability benefits associated with their activities. This scrutiny has intensified in recent
years as the labeled bond market continues to account for a growing share of the overall capital markets. While greater attention on
greenwashing risks has not derailed growth, some issuers have paused plans to bring sustainable bonds to market as concerns around
quality have increased.
Growing scrutiny of sustainable bonds comes against the backdrop of heightened focus on the credentials of sustainable investments
more generally. With more jurisdictions proposing or enforcing ESG-related disclosure requirements in 2023, legal, regulatory andreputational risks stemming from ESG positioning and potential misrepresentation will rise (see 2023 Outlook – Macroeconomic
challenges to exacerbate ESG credit risks).
Prospective issuers of sustainable bonds may be reluctant to enter a market where heightened scrutiny could expose them toreputational damage, potentially constraining growth in the market over the next year. This may be a particular challenge for the SLB
market, where issuance fell dramatically in the second half of 2022 as investors increasingly scrutinized the relevance, ambition andrigor of issuers' targets, as well as the materiality of financial penalties associated with these structures. Enthusiasm around SLBs hascooled somewhat as the nascent market struggled with differentiating the strongest from weakest targets and structures. For example,
an increasing area of focus among decarbonization targets has been whether an issuer's targets incorporate material scope 3 emissions.

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Details on the SLB market's likely growth trajectory will come into sharper relief in 2023 as early SLB issuers approach their first target
measurement dates and new developments, such as coupon step-down provisions and innovative KPIs, increasingly take hold.
Despite the challenges this heightened scrutiny may cause for near-term growth in sustainable bonds, we expect greater
standardization of best practices to safeguard the long-term rigor and credibility of the market. Initiatives such as the publication of
the China Green Bond Principles and potential implementation of an EU Green Bond Standard in 2023 have the potential to drive
such standardization over time. In addition, expansion of ESG-related disclosure practices may encourage more companies to heighten
their focus on incorporating sustainability into their corporate strategies. This could gradually expand the pipeline of green and social
projects, which will subsequently lead to a growing number of issuers making their sustainable bond market debuts.
Complex ESG regulatory and political landscape may lead to conflicting incentives for sustainable debt issuers
Although the growing scrutiny of sustainability credentials and potential greenwashing is a largely global trend, there are differences in
how ESG regulation and sentiment are evolving in different regions. As such, issuers will need to navigate an increasingly complicated,and sometimes conflicting, patchwork of regulations and views related to ESG disclosures and investing practices.
On the one hand, more jurisdictions will propose or start to enforce ESG-related disclosure requirements, raising regulatory andmarket scrutiny of companies' practices. On the other hand, companies in the US in particular will face growing pressure to exclude or
minimize the integration of ESG considerations in business and investment decisions if they are perceived to come at the expense ofshareholder returns.
This patchwork of regulations and views may have implications for potential sustainable bond issuers contemplating entry into themarket, especially those operating at a global level. As issuers navigate expectations from their various stakeholders, they may pause
or cancel plans to issue a labeled debt instrument until they gain greater clarity on how to best articulate their sustainability objectives
through their capital markets strategy. This may already be happening to a degree in some markets in the US, for example, where thecountry's share of sustainable bonds has been falling in recent years despite the significant size of the US capital markets (see Exhibit16). While year-over-year volumes from US municipal issuers and financial institutions rose modestly last year, issuances from US
nonfinancial companies fell 32%.
Exhibit 16

US market share of sustainable bond issuance has stagnated in recent years despite growing volumes
US sustainable bond issuance by label since 2016, $ billions
Green bondSocial bond

Sustainability bond

Sustainability-Linked bond% share of GSSS market (right-hand axis)

$160

30%

Annual issuance ($ billions)

$140

25%

$120
20%

$100

$80

15%

$60

10%

$40
5%

$20

$-

0%
2016

2017

2018

2019

2020

2021

2022

Sources: Moody's Investors Service and Environmental Finance Data

Public sector issuers, especially in emerging markets, will continue to expand the sustainable bondmarket and diversify use of proceeds
The role of public sector issuers will remain of critical importance to the sustainable bond markets in 2023 and beyond. Cross-bordercollaboration took center stage at COP27 as energy security, climate adaptation financing, multilateral development banks' role inblended finance and just transition rose up the agenda (see Climate finance tops COP27 agenda as talks focus on implementationof pledges). These themes have the potential to continue expansion of sustainable bond issuance from sovereign and sub-sovereignissuers, not only supporting growth in volumes but also driving diversification in the use of proceeds of labeled bonds.

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CROSS-SECTOR

MOODY'S INVESTORS SERVICEAs the physical impact of climate change remains top of mind with over $165 billion in damage in 2022 from weather and climaterelated disasters in the US alone, financing of adaptation and mitigation policies will rise in prominence as an investment theme, withpublic sector issuers playing a prominent role given that governments are typically the first line of defense in dealing with extreme
weather events. Without significant and effective adaptation capacity building, emerging market (EM) sovereigns in particular will
face significant economic and societal challenges stemming from climate change. EM sovereigns tend to be more exposed to physicalclimate risks than advanced economies and face greater challenges in developing effective plans and securing funding.
Sovereign sustainable bond issuance has steadily expanded in recent years as more sovereigns have entered the market (see Exhibit17). Global issuance totaled $115 billion in 2022, the second-highest annual tally on record, trailing only 2021 when pandemic-related
financings – especially those from the EU – helped bolster issuance. EM sovereign volumes have also been on the rise on both anabsolute and relative basis, with $25 billion of EM sovereign sustainable bond issuance in 2022 accounting for 22% of all sovereign
sustainable bonds globally, the highest share in the past five years.
For emerging-market sovereigns in particular, climate-related use of proceeds are rising up the agenda with issuance growing by 56%
in 2022. Climate adaptation and mitigation accounted for 27% and 39% of EM sovereign use of proceeds issuance, respectively, in
2022 (see Exhibit 18). Adaptation-related financing has been of particular importance for EM sovereigns in recent years, averaging
an approximate 28% share of proceeds since 2018. We expect this continued focus on climate financing in emerging markets, andadaptation financing in particular, to grow as risks evolve and governments increasingly focus on financing resilience projects.
Exhibit 17

Exhibit 18

Emerging market sovereigns modestly increased market share in
2022

Emerging market sovereigns' use of proceeds bonds have diversified
to support broader climate-related and social needs

EM sovereign sustainable bond issuance
European Union sustainable bond issuance
DM sovereign sustainable bond issuance
EM % of total sovereign sustainable bond issuance (right-hand axis)

100%
25%
20%

$150

15%
$100
10%
$50

5%

$-

0%
2018

2019

2020

2021

Sources: Moody's Investors Service and Environmental Finance Data2022

% share of EM sovereign use of proceeds

Annual issuance ($ billions)$200

Social use of proceeds
Climate mitigation-related use of proceeds
Climate adaptation-related use of proceeds
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2018

2019

2020

2021

2022

Climate mitigation-related use of proceeds include: clean transportation, eco-efficient
products, energy efficiency, green buildings and renewable energy. Climate adaptationrelated use of proceeds include: climate change adaptation, pollution prevention
and control, sustainable management of living natural resources, sustainable water
management and terrestrial and aquatic biodiversity conservation.
Sources: Moody's Investors Service and Environmental Finance Data

Despite the growth in labeled bond volumes from EM sovereigns in recent years, significant sustainable financing needs remain. For
example, the Climate Policy Initiative estimates that only about 25% of the annual spending on adaptation projects needed to reduce
the associated economic and social risks globally is currently being met. Multilateral development banks will likely play an importantrole in drawing private investment to emerging markets for climate adaptation and resilience financing. New initiatives announced at
COP27 to scale up blended finance include the World Bank Group’s new trust aimed at catalyzing climate action.
Another key area of focus given the rising attention on both climate mitigation and adaptation risks is ensuring a just transition – onethat seeks to maximize the socioeconomic benefits of decarbonization, while minimizing the impact on those negatively affected.
Two new just energy transition partnerships (JETPs) were announced at the end of 2022 for Indonesia (Baa2 stable) and Vietnam(Ba2 stable), following the launch of the first JETP for South Africa (Ba2 stable) during COP26 in Glasgow in 2021. These initiatives
provide an innovative, yet nascent, approach to supporting an inclusive energy transition in economies with high reliance on coal, andopportunity for countries to integrate such considerations into sustainable bond frameworks with both transition and social features

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MOODY'S INVESTORS SERVICECROSS-SECTOR(see JETP provides framework to kick-start decarbonization, but hurdles abound). This is a trend we expect to continue into 2023 andbeyond as transition remains top of mind for EM sovereign issuers.
We anticipate that public sector issuers will also be at the forefront of other developing areas in the sustainable bond market, suchas the financing of nature and biodiversity. Nature has come to the fore as an emerging risk for governments to consider in theiradaptation and conservation strategies, thus expanding the potential pipeline of projects for use-of-proceeds sustainable bonds.
At the 2022 UN Biodiversity Conference (COP 15), over 190 countries agreed to a global biodiversity framework that aims to put
biodiversity on a path to recovery by 2030. Signatories agreed to protect and restore at least 30% of the Earth's land and water, andhalt human-caused extinctions of species as well as promote their recovery. Another trend to watch moving forward is sovereignissuers incorporating nature-related KPIs in their SLBs, such as Uruguay's first SLB which included a target related to the protection ofnative forests in the country.

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MOODY'S INVESTORS SERVICECROSS-SECTOR

Appendix
Sustainable debt instruments definedThroughout this report, we refer to a variety of sustainable debt instruments. These include: use-of-proceeds green bonds, social bonds
and sustainability bonds, whose proceeds are typically earmarked to finance specific eligible environmental and/or social projects; andsustainability-linked bonds, whose proceeds can typically be used for general corporate purposes but whose interest rates are tied tothe achievement of various sustainability targets. These instruments include:» Green bonds: Bonds where the proceeds will be exclusively applied to finance or refinance new and/or existing eligible green
projects, such as renewable energy, energy efficiency, clean transportation, sustainable water management and green buildings.
Typically issued in accordance with the Green Bond Principles.
» Social bonds: Bonds where the proceeds will be exclusively applied to finance or refinance new and/or existing eligible social
projects, such as affordable basic infrastructure, access to essential services, affordable housing and food security. Typically issued inaccordance with the Social Bond Principles.
» Sustainability bonds: Bonds where the proceeds will be exclusively applied to finance or refinance a combination of new and/or
existing eligible green and social projects. Typically issued in accordance with the Sustainability Bond Guidelines.
» Sustainability-linked bonds: Bonds that incentivize the issuer's achievement of material, quantitative, predetermined, ambitious,
regularly monitored and externally verified sustainability objectives through Key Performance Indicators and Sustainability
Performance Targets. Typically issued in accordance with the Sustainability-Linked Bond Principles.
Note on our sources
Our primary source for sustainable debt data throughout this report is Environmental Finance Data, with such data referenced in thisreport downloaded as of 17 January 2023. Under the Environmental Finance Data methodology, all issuers are tagged as one of six
types of issuer: corporate, financial institutions, sovereign, government agency and supranational. Financial institutions include allforms of banks and asset managers; agency refers to all government agency-affiliated companies; and sovereign issuers are sovereign
governments.

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MOODY'S INVESTORS SERVICE

Moody’s related publications
Topic page
» ESG Credit and Sustainable Finance
Second Party Opinions» SK hynix Inc.: Sustainability-Linked Financing Framework Assigned SQS2 Sustainability Quality Score, 2 January 2023
» Los Portales SA: Sustainable Financing Framework Assigned SQS3 Sustainability Quality Score, 27 December 2022
» Japan Financing Organization for Municipalities: Green Bond Framework Assigned SQS2 Sustainability Quality Score, 27 December
2022» National Bank of Canada: Sustainability Bond Framework Assigned SQS2 Sustainability Quality Score, 22 December 2022
» U.E. S.p.A.: Framework for Green Financing Assigned SQS2 Sustainability Quality Score, 22 December 2022
» Air France–KLM Group: Sustainability-Linked Financing Framework Assigned SQS2 Sustainability Quality Score, 20 December 2022
» Alpen Glasfaser GmbH: Green Loan Assigned SQS2 Sustainability Quality Score, 20 December 2022
» District of Columbia Water & Sewer Authority: Series 2022B Green Bonds Assigned SQS2 Sustainability Quality Score, 16
December 2022
» First Finance Plc: Social Financing Framework Assigned SQS2 Sustainability Quality Score, 14 December 2022
» Japan Student Services Organization: Social Bond (70th) Assigned SQS2 Sustainability Quality Score, 29 November 2022
» Government of Egypt: Sustainable Financing Framework Assigned SQS2 Sustainability Quality Score, 9 November 2022
» Iberdrola S.A.: Framework for Green Financing Assigned SQS1 Sustainability Quality Score, 7 November 2022
» Kunming Rail Transit Group Co., Ltd.: Green Finance Framework Assigned SQS2 Sustainability Quality Score, 1 November 2022
» Framework to Provide Second Party Opinions on Sustainable Debt, 3 October 2022
Sector research» ESG – Global: 2023 Outlook – Macroeconomic challenges to exacerbate ESG credit risks, 9 January 2023
» Carbon Transition – Indonesia: JETP provides framework to kick-start decarbonization, but hurdles abound, 15 December 2022
» ESG – Global: ESG considerations have significant credit impact on large number of debt issuers, 23 November 2022
» Carbon Transition – Global: Climate finance tops COP27 agenda as talks focus on implementation of pledges, 20 November 2022
» Banks – Cross-Region: Net zero financed emissions plans show progress but underscore challenges, 10 November 2022
» Carbon Transition – Global: Decarbonization plans mitigate transition risk; limited disclosures inhibit assessment, 8 November 2022
» Sustainable Finance – Global: Sustainable bonds fare better than broader market, despite third quarter decline, 2 November 2022
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report andthat more recent reports may be available. All research may not be available to all clients.

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Sustainable Finance – Global: Sustainable bond issuance to rebound 10% in 2023 to $950 billion, short of record high

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REPORT NUMBER

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Sustainable Finance – Global: Sustainable bond issuance to rebound 10% in 2023 to $950 billion, short of record high