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Financial institutions (FI) and development banks (DB) are likely to issue record volumes of bonds designed to fund sustainability objectives in 2021, according to a report by Moody's Investors Service.

"Our view reflects sustained strong demand for these instruments as investors increasingly apply environmental, social and governance (ESG) criteria in selecting portfolio assets," it said.

The projected increase this year comes after sustainable bond issuances from these entities reached a historic high in 2020, with a pandemic-related rise in social and sustainability bond placements outweighing a moderate decline in green bond volumes.

The report noted that European institutions remain among the biggest issuers among FIs and DBs, reflecting the European Union's (EU) ambitious sustainability policy agenda, which is increasingly matched by the US, Canada and China.

"We expect global issuance of green, social and sustainability bonds by FIs and DBs to approach $300 billion in 2021. This would mark an increase of around 30 per cent from last year, when issuance from these sources rose more than 69 per cent compared with 2019 to a fresh record of $225 billion," it said.

Placement of social and sustainability bonds by FIs and DBs more surged to $123 billion last year as these issuers raised funding for coronavirus response programmes. This outweighed a 2 per cent decline in their issuance of green bonds.

While issuance of green instruments cooled off in 2020, Moody's expects renewed momentum this year due to supportive governmental policies in major jurisdictions. A combination of strong investor demand, policy measures and standardisation of regulations will drive further growth, it added.