Column: Exciting sustainability trend in the Swedish corporate bond market

The Swedish market for corporate bonds is in the midst of a structural growth phase. The favourable interest rate environment together with stricter lending conditions from banks have made it more interesting for companies to consider the alternative of financing themselves in capital markets. At the same time, the Riksbank’s expansive monetary policy and negative interest rates have increased the demand from investors for more high yielding fixed income products. The Swedish corporate bond market experienced a new record year in 2017 with regards to the volume of new bond issues, with total new issuance volume of close to SEK170bn, an increase of more than 60% compared to 2016. So far in 2018, new issuance activity has remained high and not far from last year’s levels.

The Swedish real estate sector is the single largest sector in the Swedish corporate bond market. In recent years, Swedish real estate companies have increased their share of capital market funding materially by the issuance of bonds. Currently, the total volume of bonds outstanding among Swedish real estate companies amounts to SEK220bn. This can be compared to a total volume of SEK180bn only three years ago. This year’s increase has primarily been driven by several companies changing their funding structures from traditional bank funding to corporate bond financing in order to broaden their funding bases and achieve “investment grade” credit ratings.

Moreover, a clear trend in the growing corporate bond market is that the volume of green / sustainable bonds continues to increase sharply. During the first eight months of this year, a total of SEK55bn in green and sustainable bonds has been issued in the Swedish market. This represents an increase of 123% compared to the corresponding period last year. Swedish real estate companies have taken a clear lead in this sustainability trend. Currently, the sector represents more than 80% of the outstanding green / sustainable corporate bonds in SEK.

Swedish investors have been active in green bonds since 2008. Still, it was a very marginal market up until the end of 2013. That year, Vasakronan became the first company in the world to issue a green bond, while the city of Gothenburg became the first city in the world to issue green bonds. Since then, a number of Swedish companies have issued green bonds, including several real estate companies such as Castellum, Fabege, Jernhusen, Kungsleden and Klövern. The issuance of green bonds by real estate companies is facilitated by the fact that they often already have a high proportion of environmentally certified properties, both under construction and in their existing property portfolios, that can be used as a basis for the green bonds.

Currently, green bonds constitute just over 11% of the total volume of bonds issued in Sweden in 2018. In the Swedish real estate sector, more than 15 companies have now established green bond frameworks. Thanks to this high issuance activity, the market for green bonds in SEK is the fourth largest in the world after USD, EUR and CNY.

Our belief is that green bond issuance volumes will continue to grow sharply in the future as demand among investors to invest in green products increases, at the same time as more companies invest in sustainable projects. For those companies that chose to finance themselves with green bonds this also provides an opportunity to broaden their investor base. Furthermore, the green bonds tend to result in a slightly lower funding cost for the issuer compared to a normal bond thanks to the strong interest in the product. We see this as a positive trend, as the mobilisation of private capital to fund sustainable investments is crucial if we are to achieve ambitious climate goals and ultimately a sustainable environment.

Louis Landeman
Head of Credit Research Sweden at Danske Bank