The U.S. is the largest individual country source for green, social and sustainability (GSS) bonds, but without Fannie Mae, it would drop to third place.

That’s because Fannie Mae issued $94 billion in green bonds between 2011 and March 2021, accounting for more than one-third of the $275 billion in GSS debt U.S. entities issued for that period, according to Caroline Harrison, research analyst at the Climate Bonds Initiative and co-author of the new report Sustainable Debt: North America State of the Market 2021.

By comparison, Canadian entities have issued $35 billion in GSS bonds, putting the total for North America at $311 billion through March, Harrison said during a recent webinar launching the report.

Of that total “87% of that volume was green, and the remaining 13% comprise social and sustainability bonds, which are small but rapidly growing segments of the market,” she said.

Supranational entities, which are formed by two or more governments, are responsible for the most GSS debt in the world — about $425 billion — most of which comes from sustainability bonds, Harrison said. For total issuances, the U.S. ranks behind supranationals with the support of Fannie Mae, and without the mortgage association, it falls behind France and China, she added.

Fannie Mae’s work in the green bond market has focused on multifamily housing for the last 10 years, said Lisa Bozzelli, senior director of multifamily capital markets at Fannie Mae.

“We’ve issued over $95 billion of green, multifamily [mortgage-backed securities] to date, primarily through either a green building certification or a renovation program called Green Rewards, where we focus on energy- and water-consumption reduction improvements,” Bozzelli said during the webinar.

But even with Fannie Mae as a powerhouse for U.S. GSS bonds, there is a lot of room for the market to grow, Harrison said.

“At the end of [the first quarter], total GSS debt from the U.S. constituted 0.6% of the [$46 trillion] local bond market,” she said. In Canada, she added, it’s 0.9%.

Growth Opportunities

While green bonds are the most well-developed of the GSS market in the U.S., social and sustainability bonds experienced rapid growth in 2020 and are keeping pace this year.

Issuances of bonds in the U.S. that promote positive social outcomes now total $14 billion, and the segment represents 5% of the GSS market, the report said. Sustainability bond issuances — those with a combination of green and social projects or activities — now total $21 billion, representing 7.5% of the market.

Municipalities lead the social bond segment, according to the report, which said the Colorado Housing and Finance Authority has 32 social bond tranches. For the sustainability segment, the report said, the private sector is the primary driver, with Google parent company Alphabet sealing a $5.8 billion deal last summer.

The net-zero energy transition and the securitization market could have a “substantial impact on growth dynamics” for North America GSS bonds, Harrison said.

Sustainable debt markets are well-positioned to support an energy transition that is driven by aggressive federal and state policies, she said, adding that the development of new instruments and labels will help.

One example, according to the report, are transition investments, such as sustainability performance-linked bonds (SLB) and bonds labelled as related to the energy transition, which are becoming prevalent. The global market for the two transition investments totaled $35 billion as of the first quarter of 2021.

“Transition financing is intended to broaden the scope of industry sectors that can get involved in the collective decarbonization effort,” the report said. “Many North American companies across the key sectors of energy (generation and utilities) and transport (auto and aviation) appear poised to take advantage of the variety of transition funding mechanisms available to them, including green bonds, SLBs and transition bonds.”

The North American securitization market, which totaled $12.7 trillion at the end of last year, also is “ideally placed” to support a net-zero economy, Harrison said.

The market currently includes commercial mortgage-backed securities, residential mortgage-backed securities, and asset-backed securities (ABS), but Harrison said there are several areas that are ready for expansion, including electric cars and solar power.

Toyota brought three green auto receivables bonds to the market worth $4.6 billion, securing them against the cash flows from existing car leases, the report said. The proceeds financed new leases and loans on hybrid and electric vehicles.

As car purchases shift to zero-emission vehicles in the next 10 years, the report said, green auto receivables that are available for securitization will accelerate.

Solar ABS are the second largest source of green securitization in the U.S., with 44 deals totaling $10 billion. Strong incentives and policy support are in place to help solar grow across the country, which will present a huge opportunity for debt issuances backed by the cash flows of solar assets, the report said.

Market Imperatives

Fostering more GSS bond acceptance in North America will require leaders in the U.S. and Canada to take a more active role in the market, Harrison said.

In the U.S., she said, the federal government “must follow Canada’s lead and announce a green sovereign bond … and incorporate green bonds into the public debt program.”

In addition, she said, the U.S. market needs more diversity in GSS bond issuers.

“Entities from all economic sectors can issue GSS bonds to finance the transition of their activities to protect their revenues from climate risks,” the report said. “And yet, the North American GSS market is totally dominated by agencies and municipalities with very little representation from the real economy, especially heavy emitting sectors.”

That diversity, Harrison said, could be realized through better visibility of the pathways for decarbonizing sectors that are deeply invested in fossil fuels.

She added that more benchmark-size issuances ($500 million-plus), repeat issuances, and better reporting all would help the market.

Better Reporting

Environmentally friendly bonds in the U.S. are not as transparent as they could be, as compared to the global market, according to the report.

“For the sake of transparency and integrity, green, social and sustainability debt issuers commission an external review on the credentials of the use of proceeds before a bond is issued,” Harrison said. “This enables investors to assess whether the instrument complies with expected standards and to determine whether the instrument falls in with their investment objectives.”

While the share of bonds without an external review is decreasing, she said, third-party reviews are the least common among U.S. issuers, “with at least 27% of annual issuance volume not obtaining a review.”

Reporting on the outcomes of GSS bonds, also called impact reporting, is an equally important aspect of GSS bond disclosures, the report said.

The U.S. GSS market should see improvements in the availability and quality of impact reporting in the near term.

“Now that sustainable finance is gaining more traction under the Biden administration, continued development of the U.S. green bond market is likely to bring improving post-issuance disclosure practices from both private and public sector entities,” the report said.