Global sales of ethical debt set to suffer first drop as high rates deter borrowers
THE gold rush for greener debt may be over. Global sales of ethical debt are set to suffer their first drop this year, as volatility and higher rates deter borrowers. Next year may see a slight recovery, yet arrangers and analysts aren’t predicting a return to the exponential growth of the past decade that turned a fringe concept into a $5.6 trillion asset class.
There’s plenty of factors that risk holding it back now, from growing regulation in Europe and a political backlash against ESG in the US, to greater scrutiny from buyers and bankers needing more time to get deals done. That’s taken the market from commanding a so-called “greenium” to underperforming conventional debt. “We expect greenwashing concerns and higher rates to continue to be headwinds to overall supply and to keep the amount below 2021’s highwater mark,” said Carolyn L Campbell, a strategist at Morgan Stanley.
While Morgan Stanley and Barclays Plc predict just under $1 trillion of global ESG bond sales in 2023, many market watchers seem to be holding back on forecasts, after uncertainty in the wake of Russia’s invasion of Ukraine. Global sales of ESG and green bonds have reached about $870 billion this year, a 15% drop on the bumper $1.1 trillion sold in 2021, according to Bloomberg Intelligence data.
Challenges in Europe
EUROPE, where ESG bonds now make up a quarter of the primary market, is expected to continue to lead the sector with around €350 billion ($372 billion) in sales. Yet even here, there are challenges.
There’s been a decline in post-pandemic social spending by governments, while a looming recession and an energy crisis mean policy makers may prioritize national security and financial liquidity over long term sustainability, said Bloomberg Intelligence analysts Christopher Ratti and Remus Negoita in a report.
Governments and agency sales will only post mild growth, while issuance from another key sector— financial institutions—will lose “some steam” given an anticipated slowdown in general lending, according to ING Groep NV strategists including Nadege Tillier.
“For 2023 a stabilization is likely,” said Stephan Kippe, head of ESG research at Commerzbank AG, of the euro ESG market. “Growth in this market segment seems unlikely though, absent any surprising events like a potential decision by the EU or member states to use social bonds as a means to finance energy cost support measures.”
Regulators getting tougher
REGULATORS are also getting tougher as they seek to prevent greenwashing, after companies from Tesco Plc to Chanel have come under fire for setting soft goals when selling debt. Lawmakers want to extend voluntary standards so that climate transition plans are mandatory for all issuers. That’s already drawn an industry warning that it could hurt sales.
“Its potential effects to sustainable bond market activity and Europe’s clear leadership position thereof have not been properly scrutinised,” said the International Capital Market Association. “Listing of sustainable bonds in the EU may be particularly impacted.”
In the US, the market is also feeling the heat from politicians—but in this case, Republican officials who are sharply critical of ESG investing as a concept. Intense scrutiny may delay or hurt sales, according to BNP Paribas SA, the biggest arranger of green bonds globally this year.
“Most corporates are interested to issue ESG bonds,” said Anne van Riel, the head of sustainable finance capital markets for the Americas at BNP Paribas, in an interview in New York. “At the same time there’s a little bit of, ‘if we do it, let’s do it right,’ because of all the attention to ESG. They may take more time to structure, which will definitely impact volumes in the end.”