Bradford Cornell, emeritus professor of finance at UCLA and senior adviser at Berkeley Research Group, says regular bonds that have rights to a company’s cash flow for general use should be superior to ESG bonds that require proceeds to be used for specific projects. For example, if a company has issued green bonds to finance a wind farm, it has to go through with the project even if it’s no longer viable. If it had raised money with a regular bond, the proceeds could still be used for green projects -- or any other purpose, if the business demands it.
“There’s no reason to think that an ESG bond is going to perform any better,” said Cornell in a telephone interview Monday. In fact, he said, the opposite is true: “It should perform slightly worse because it doesn’t have the general collateral behind it.”
Environmentally-friendly investors may also be missing out by shunning dirty sectors. In the U.S. corporate high-yield market, the energy sector is outperforming the broader junk index as Russia’s invasion of Ukraine continues to disrupt supply and push oil prices higher. And debt from coal miners is the best performer in the U.S. junk market so far this year as prices for the fuel hit a record high.
Some ethical investors do own ESG-linked debt from the energy sector. The Russia-Ukraine situation is accelerating the move away from fossil fuels to alternative forms of energy, so ESG bonds may still be a good long-term bet, Rich argues.
“While ESG names are certainly underperforming today, I believe that will reverse over the medium term as that trend toward renewable energy continues and accelerates,” he said.
-With assistance from James Crombie and Sydney Maki.
This article was provided by Bloomberg News.