By Isla Binnie

NEW YORK (Reuters) – Global sales of corporate bonds with environmental, social and governance (ESG) targets will rebound this year and top $460 billion, Barclays said, after the asset class had its first setback in 2022 as higher interest rates weighed on credit markets.

ESG bond volumes swelled over the past few years but dropped by 22% in 2022 amid a broader slowdown in corporate bond issues, as companies faced significantly higher borrowing costs due to aggressive monetary tightening actions by global central banks fighting inflation.

Corporate ESG bond issuance fell to $362 billion last year from $461 billion a year earlier, Barclays said in a credit research note. It expects ESG bond sales to grow by 30% this year and rebound to almost the same levels of 2021, predominantly driven by green bonds.

We expect green bond issuance to continue to dominate the market thanks to strong demand and a long list of green projects that need funding as companies put decarbonisation plans into action,” Charlotte Edwards, Head of ESG FICC Research at Barclays, said in the note.

Shifting the planet’s energy system away from fuels that emit greenhouse gases will cost $2 trillion a year by 2030, according to estimates from the International Energy Agency.

Companies and banks have crafted new instruments to help fund the transition.

Among ESG debt options, green bonds’ dominance is yet to be challenged by a newer type of instrument, sustainability-linked bonds, which carry penalties for borrowers if they fail to meet certain targets.

Companies can secure cheaper financing through green bonds, Barclays said, and their relative appeal has increased even further as investors doubted the key performance indicators used in the less mature sustainability-linked securities.

Volumes may have been stunted by concerns from investors around greenwashing in the market (due to concerns around unambitious targets, immaterial KPIs and small penalties),” Edwards said.

Issuance of SLBs declined sharply to $60 billion from $95 billion in 2021.

(Reporting by Isla Binnie; additional reporting by Davide Barbuscia; Editing by David Gregorio)