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. U.S.–based companies sold just $18.2 billion of the debt, known as environmental, social, and governance (ESG) bonds, through August 16—the least since 2019’s $12.5 billion, 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 U.S. ESG-related stock mutual funds have returned 14 percent 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 clamored 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 $94.5 billion in ESG bonds in 2021 on the back of that demand.
The politicization 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 U.S. high-grade market, resulting in a loss of investor appetite that has made it less practical for U.S. companies to come to market.
Debut issuers in particular, which turbocharged the U.S. ESG market during the pandemic years, have been pulling back. First-timers typically have to draft a bond framework outlining how the proceeds will be used, pay for the framework to be verified by third parties, and take on the burden of reporting the use of proceeds to investors annually.
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 prioritized 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 Inc. “If you then add on top of that the facts 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? That’s probably what CFOs are weighing.”
The six biggest U.S. banks, which used to be regular issuers of the bonds, have also retreated. Last year, they collectively raised $3.2 billion of ESG debt, the lowest volume since 2018, Bloomberg-compiled data shows. Citigroup Inc. remains the only big Wall Street bank that has issued a benchmark-sized ESG bond this year, while Bank of America Corp.—the biggest corporate issuer of U.S. ESG bonds—last came to the market in June 2023. Both offerings were in the European high-grade market.
“Our sustainable bond offerings generally track with our overall debt issuance, which has steadily declined over time,” a BofA representative said in a statement.
To be sure, not everyone is pessimistic about the future of the U.S. ESG debt market.
“While the market may not see the issuance of labeled securities as frequently in the U.S., U.S. 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 5 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 U.S. will disappear; rather, it will continue to evolve and become increasingly differentiated from its global peers,” she said. “Some industries, particularly those traditionally hard-to-abate sectors, will have the opportunity to pursue financing linked to transition innovation. This may develop more quickly than others in the global arena.”
Outside the United States, issuers are selling ESG bonds at an accelerated pace. Global sales stood at over $660 billion as of August 16, up 6.9 percent compared with the same period last year, data compiled by Bloomberg shows, as sovereign issuers—including nations selling the bonds for the first time—are helping drive sales. In Europe, which dominates the sustainable debt market, green corporate bonds have gained 2.5 percent this year, roughly in line with the 2.4 percent gain for plain-vanilla debt.
Even so, companies like Irish building materials business CRH Plc, which are considering issuing ESG debt, have so far hesitated to take the plunge.
“It didn’t make sense financially,” said Jim Mintern, CFO of CRH. “There wasn’t the competitive aspect on the interest rate coupon to support the investment. It has to make sense.”
Bloomberg News reached out to at least two-dozen U.S.-based companies that have issued ESG bonds in the past for this story, including the nation’s six biggest banks and Apple Inc., Amazon.com Inc., Mastercard Inc., and Walmart Inc.
All except BofA, Prologis, and CRH either declined to comment or didn’t respond to a request for comment, with a few of them referring Bloomberg to their latest green bond reports.
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