The Bond Market’s Green Thumb

April 8, 2021

Source: Bloomberg; Data includes annual corporate issuance of “Green Instruments” from 2008 through 2020 Source: Bloomberg; Data includes annual corporate issuance of “Green Instruments” from 2008 through 2020

The first official green bond was issued by the World Bank through its lending arm, the International Bank for Reconstruction and Development (IBRD), in November 2008. Since then, public and private U.S.-domiciled companies have issued in excess of $90 billion in green-designated bonds. That figure does not include those green bonds issued by municipalities, government entities or “supranationals.” While annual corporate issuance fell year-over-year from 2015 to 2017, the growth from 2017 to the present day has been exponential; cumulative issuance increased from just over $20 billion in 2017 to more than $90 billion by the end of 2020. Annual issuance of roughly $35 billion of U.S. corporate green bonds in 2020 represented over one-third of the cumulative issuance from 2008 to 2020 and a 39% increase from 2018.

With record issuance levels of broad corporate debt mounting, green bonds have kept pace with the overall market. Despite an underlying expectation that the majority of sustainable debt is being offered by utilities or energy firms, companies like Citigroup, Apple and Verizon have brought some of the largest green bond issues to market recently. An increasing number of companies are issuing this sustainable debt as investor demand has grown in recent years and long-end rates have been relatively low. Some companies exaggerating their sustainability intentions have taken advantage of such demand. Lower borrowing costs and the rise of environmental, social and governance (ESG) investing have encouraged more companies to join the party.

The boom in sustainable debt issuance has given way to the dilemma of “greenwashing.”  The influx of both investors and corporations to the realm of responsible investing is nothing new. However, the influx of investors and corporations to the realm of ESG investing is relatively new, and this niche has become tremendously popular. Greenwashing highlights the eagerness of investors to buy up green-designated bonds, often purchasing such debt for the sake of its favorable designation. As a result, companies are designating projects as “sustainable” or “environmentally responsible” that would otherwise not warrant the designation, relying on investor appetite for these ESG assets.

Clear-cut standards have yet to be established for the issuance and use of proceeds from sustainable debt. However, the Biden administration has made it clear that improved corporate environmental-impact disclosures are needed. These disclosures would hold firms accountable for overstating their sustainability efforts and taking part in greenwashing.    

Key Takeaway

The rush to allocate funds to ESG debt has caught the attention of both corporate borrowers and the broader finance community. Green bonds have proven to be a meaningful source of diversification for investors and a reliable source of funding for sustainable corporate initiatives. Although companies continue to face pressure to disclose more environmental impact metrics, I expect green bond issuance to increase as a proportion of total corporate debt issuance.

The push to hold companies more accountable comes with presidential approval, as the Biden administration has urged regulators to consider requiring environmental impact disclosures. These measures should help to prevent greenwashing, while also boosting demand for sustainable debt. Additionally, some investors who would have otherwise avoided ESG debt may be attracted by the improved transparency on the part of corporate issuers. The strong demand for green bonds and ESG investments, in general, is warranted, although investors should be wary of allocating funds to those offerings for the sake of their green designations.

Tags: green bonds | bond market | ESG | ESG investing | environmental impact disclosures | greenwashing | sustainable debt

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