(30 May 2023 – United States) Stricter regulation, tighter credit conditions and general scepticism about the validity of environmental, social and governance (ESG) investments has exposed inferior dealmaking from the US$6 trillion market for sustainable debt.
Since Verizon Communications started selling green bonds. investors now closely examine terms and conditions while borrowers must establish their credibility if they want to issue green debt that meet ESG criteria.
It’s a major shift from the early days, when bond sellers were able to market ESG with relatively few questions asked. Now, money managers want to know exactly what they’re buying, and they can afford to be picky.
Global ESG bond markets are heating back up in 2023. Sustainable bond sales totaled more than US$86 billion in April, the most ever. Issuance of green bonds, the largest category of sustainable debt by amount, surpassed US$53 billion, also a record April high.
As bond sellers return to the market this year, they’re being more careful about what they label ESG. Scrutiny has been intensifying. Borrowers including luxury fashion house Chanel Ltd. and UK grocery chain Tesco Plc have been called out by investors for setting weak ESG goals. Regulators have cracked down on the practice of overstating environmental benefits, know as greenwashing.
Investors who once agreed to pay a higher price for green bonds than for traditional debt (a “greenium”) started demanding discounts, according to a BloombergNEF analysis in December. Sales of sustainable debt securities by companies and governments worldwide dropped 22% in 2022, the first annual slowdown in 15 years of record-keeping, data compiled by Bloomberg show.
“That’s the best recipe to have a successful program. Transparency can help an issuer stand out from some of the noise coming from transactions that maybe have lesser quality of reporting.” Krohn says.
“Before, borrowers were just looking to try to find an excuse to slap a label on a bond. These days, ESG bond terms are feeling a lot more concrete and a lot more authentic” commented Sage Advisory Services Senior Research Analyst, Andrew Poreda.
“More-credible ESG debt stands to offer better returns for investors. Standards have certainly improved” stated T. Rowe Price Group Money Manager, Matt Lawton.