Goldman says goodbye to ‘greenium’ as ESG now priced like all debt

HIGH-GRADE borrowers in the US and Europe seeking to sell bonds for environmental, social and governance (ESG) projects should expect no cost discount as in the past, said Goldman Sachs Group.

“The ‘greenium’ thrill is gone,” analysts led by Michael Puempel and Lotfi Karoui wrote on Monday (Jan 16), referring to the premium offered on ESG bond sales in the days before the market grew to more than US$5.6 trillion.

The analysts said there was no difference in funding costs between conventional debt and bonds linked to ESG efforts, after controlling for factors such as industry, rating and maturity alongside the macro backdrop over time.

As recently as June 2022, the average yields at issuance for ESG-focused, US dollar-denominated high-grade portfolios was about 4.8 per cent. This was lower than the 5.4 per cent for non-ESG portfolios, according to Goldman’s analysis, as investors sought the debt for funds focused on those principles. But both portfolios had a yield at issuance of about 6 per cent by November 2022.

A rout in global credit markets last year, coupled with the political backlash against ESG in the US and elsewhere, as well as heightened investor scepticism, have all helped to erode the so-called “greenium”. A separate analysis by BloombergNEF showed that, on average, borrowers now actually have to offer a higher interest rate to sell ESG debt than when issuing traditional debt.

The political pushback and higher borrowing costs in 2022 helped cause the first-ever sales decline in the global sustainable-debt market.

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Sales of sustainability-linked bonds (SLBs), which can be used to fund just about anything as long as borrowers pledge to meet certain ESG goals, plunged 21 per cent to US$86 billion last year. Investors such as T Rowe Price Group and Nuveen have criticised the SLB structure, pointing to targets that are sometimes so easily achieved — or are all but impossible to enforce — that they render the point of the investment strategy meaningless .

Goldman agreed that the economic penalties typically were not “punitive enough” to ensure issuers would ultimately take steps to meet their targets, leaving “reputational risk as the dominant incentive mechanism”.

Many ESG-focused investors are unconvinced that reputational risk will be enough to assure that key performance indicators are met, causing some to shy away from SLBs. This is wearing away the price benefit for SLB issuers such as Enel, the first and biggest issuer of SLBs worldwide. The Italian power utility offered investors huge new issue premiums when it priced US$4 billion in the US high-grade market in October 2022.

The Goldman analysts noted that SLBs “have started to lose their lustre”. BLOOMBERG