A $319 Billion Corner of ESG Bond Market Faces ‘Slow Demise’
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(Bloomberg) -- Sustainability-linked bond deals have tumbled this year, prompting bankers and investors to question whether the $319 billion market will ever regain favor.
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Companies and government bodies have so far raised $37.6 billion via the instruments, known as SLBs, about 46% lower than in all of 2023, according to data compiled by Bloomberg Intelligence. 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.”,
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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 NV. “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 scrutinized by markets, Hoogerwerf said.
Other segments of the market are faring better. Issuance of all sustainable debt — including bonds and loans with green, social, sustainability and transition labeling — has risen above $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 $685 billion this year, led by the US, in the highest total on record, according to the BI data.