Bonds that fund companies’ environmental projects, or give corporations an incentive to improve their governance or achieve social goals like boosting gender equality, have seen sales drop this year. US-based companies sold just $18.2bn (€16.4bn) of the debt, known as environmental, social and governance bonds, through August 16 – the least since 2019’s $12.5bn, data compiled by Bloomberg shows.
The decline comes as sales of other investment-grade corporate debt has jumped.
Banks and investors cite a series of reasons for the drop. Republican politicians in states like Texas and Kansas have been trying to block government entities from considering ESG issues when buying securities. More investors are questioning whether the bonds achieve their goals or just amount to greenwashing. And US ESG-related funds have returned 14pc on average this year, underperforming the S&P 500 index.
This marks an about-face from a few years ago when demand for sustainable debt funds surged as investors clamoured for assets aimed at making the world better, in the aftermath of the Covid-19 pandemic and social upheaval following the killing of George Floyd. Companies issued a record $94.5bn in ESG bonds in 2021 on the back of that demand.
The politicisation of ESG debt has also eroded the price advantage that issuers enjoyed during the ESG market’s boom years.
Environmentally-conscious investors previously rewarded issuers with a juicy so-called greenium – the spread of an issuer’s green bonds to non-green bonds. But that price benefit has been disappearing in the US high-grade market, resulting in a loss of investor appetite.
CFOs have also had to sometimes halt funding plans as recession concerns and central bank rate hikes roiled global debt markets. When issuance windows do open, treasurers have prioritised executing plain vanilla deals over more time-consuming green bonds.
“If you’ve got concerns about future market volatility, your focus is on getting the deals done now,” said Tracy Patel, senior vice president of capital markets at Prologis. “If you then add on top of that the fact that they may not have a framework and the greenium is uncertain, when you’re in that situation, are you going to potentially slow yourself down?”
The six biggest US banks have also retreated. Last year, they collectively raised $3.2bn of ESG debt, the lowest volume since 2018, Bloomberg-compiled data shows. Citigroup remains the only big Wall Street bank that has issued a benchmark-sized ESG bond this year, while Bank of America – the biggest corporate issuer of US ESG bonds – last came to the market in June 2023.
“Our sustainable bond offerings generally track with our overall debt issuance, which has steadily declined over time,” a BofA representative said in a statement.
Not everyone is pessimistic about the future of the US ESG debt market.
“While the market may not see the issuance of labelled securities as frequently in the US, US companies aren’t necessarily operating differently,” said Emily Kreps, Deutsche Bank AG’s global head of ESG and sustainable finance, and head of ESG Americas. She points out that corporate strategies are set five to 10 years in the future, which means leaders may continue executing them in the long-run.
“I don’t think the green bond market in the US will disappear, rather it will continue to evolve and become increasingly differentiated,” she said.
Outside the US, issuers are selling ESG bonds at an accelerated pace. Global sales stood at over $660bn as of August 16, up 6.9pc compared to the same period last year.