A US$319 billion corner of ESG bond market faces ‘slow demise’
SUSTAINABILITY-linked bond deals have tumbled this year, prompting bankers and investors to question whether the US$319 billion market will ever regain favour.
Companies and government bodies have so far raised US$37.6 billion via the instruments, known as SLBs, about 46 per cent lower than in all of 2023, according to data compiled by Bloomberg Intelligence (BI). The product suffered the most in the US amid an ESG backlash, and Donald Trump’s anti-climate agenda will likely continue to weigh on fundraising.
The bonds, tied to environmental, social and governance targets for issuers rather than specific projects, have come under fire for greenwashing claims and over difficulties in tracking the sustainable goals. Tougher regulations in Europe, the largest market, and a disappearing “greenium” discount for borrowers are further souring interest in a market that peaked in 2021.
The market is set “for a slow demise,” said Xuan Sheng Ou Yong, sustainable fixed-income lead for Asia-Pacific at BNP Paribas Asset Management in Singapore. For investors, “it’s tough to keep track of performance indicators and how they are being met, and green bonds allow for easier due diligence.”,
Borrowers using SLBs raised the lowest combined amount since 2020, BI data show. The US has had no deals so far in 2024, after being among the more active venues last year. There isn’t massive demand for this debt type and “we’re also not hard pitching it to clients,” said Martijn Hoogerwerf, head of sustainable finance for Asia-Pacific at ING Groep. “What are the benefits for an issuer to enter into an SLB? That’s a bit of a question mark.”
Companies are instead opting for green bonds or sustainability-linked loans, which are privately handled between banks and issuers and less scrutinised by markets, Hoogerwerf said.
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Other segments of the market are faring better. Issuance of all sustainable debt – including bonds and loans with green, social, sustainability and transition labelling – has risen above US$1.49 trillion this year, surpassing the 2023 total and ending two years of successive declines, according to BloombergNEF.
Green bonds alone are on track to raise US$685 billion this year, led by the US, in the highest total on record, according to the BI data.
Issuance of SLBs has fallen almost 90 per cent in the Americas this year and about 30 per cent in the Europe, Middle East and Africa region, with a smaller decline of almost 8 per cent in Asia-Pacific, the BI data show. Asia’s total topped the Americas for the first time.
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Investors are questioning the value of targets for action tied to SLBs.
Next year will be crucial, as almost 100 of the bonds will have so-called observation dates, when lenders assess whether ESG targets have been met, according to an analysis by Sustainable Fitch.
Bankers have become “much more careful about what structures we take to the market,” given the scrutiny of targets, said Atul Jhavar, who leads Barclays’s sustainable capital markets business in Asia-Pacific.
Italian power firm Enel – the first company to issue such a bond in 2019 – said in April it will raise its debt coupons after missing emissions targets for 2023 due to Europe’s energy crisis. The move could add nearly US$90 million to interest costs for Enel, whose unit was the largest issuer of SLBs this year.
In Asia, the Philippines had its first SLB issuance this year, by real estate firm Ayala Land, while the Thai government raised about US$900 million in the region’s first sovereign deal.
That was followed by other local currency sales in China and Japan.
SLBs issued in Asia typically have lower interest rate penalties for missing targets, relative to global peers, according to a Bloomberg analysis of 80-plus deals this year in the region.
Almost a quarter of the securities allow companies to make charitable donations when they miss targets, which do not compensate investors and are hard to track.
Other instruments that did not promise coupon changes were tied to buying carbon credits.
A majority of the bonds also had at least one key performance indicator that was not disclosed publicly, and some had penalties of just one basis point.
Some SLBs have been criticised for having penalty dates that fall in the latter half of the bond’s tenor, meaning any coupon increase may last only a few years.
The Thailand government’s SLB issued in November includes targets tied to 2030 goals on emissions reduction.
Potential coupon penalties if the objectives are not met would kick in only from June 2036, four years ahead of maturity.
The nation’s Public Debt Management Office did not immediately respond to a request for comment. BLOOMBERG
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