U.S. sales of bonds designed to help companies do good are plunging amid pressure from investors and Republican politicians.
Companies sold about $6 billion of bonds last quarter to pay for projects that help the environment, achieve a social goal, or improve their governance, a type of debt known as ESG. That’s down more than 50% from the same time last year, according to data compiled by Bloomberg, which focused on companies outside the financial industry.
The slump in issuance comes amid a political assault on ESG investing by some of the biggest names in the Republican party, including former Vice President Mike Pence and the governors of Florida and Texas, Ron DeSantis and Greg Abbott. DeSantis, a likely 2024 presidential candidate, said last month that he’s leading an alliance of 19 states intent on banning ESG investing outright.
“Before, ESG could do no wrong and the scrutiny that should have been there wasn’t there,” said Andrew Poreda, a senior research analyst at Sage Advisory Services. “Now there’s more skepticism and policing.”
Some states are prohibiting external asset managers that oversee public pension funds and other investment pools from considering ESG criteria, wrote JPMorgan Chase & Co. credit analysts led by Eric Beinstein and Nathaniel Rosenbaum in February. That could be making borrowers less interested in selling ESG debt, they wrote.
Many investors are reconsidering their approach to ESG. Almost half of North America’s biggest investors worry that the politics around ESG securities in the U.S. exposes them to legal risks, according to a global survey of firms overseeing $27 trillion published last month.
Marketing ESG and green bonds to investors has gotten harder with these pressures, said the global head of ESG debt at a Wall Street bank that underwrites large amounts of corporate bonds. Asset managers in charge of state and local money increasingly have to demonstrate that there are other reasons for their buying an ESG bond, not just the label, said the banker, who declined to give his name. That could impede further growth in the market as U.S. companies delay their bonds or decide to not bring them, he added.
Sales of the bonds as a share of overall issuance have also fallen, with ESG debt in the first quarter making up 2.47% of about $248 billion in bonds issued by U.S. companies globally. That compares to about 6.08% of the $209 billion sold during the prior-year period.
In Europe, the world’s leading market for ESG bonds, the story is different. Sales of the bonds made up up 39% of total corporate issuance in the first quarter, up from about 33% during the same period last year. And global sales of green bonds, the largest category of sustainable debt by amount, posted the busiest quarter since green bonds first emerged in 2007.
Meanwhile in the U.S., Texas Comptroller of Public Accounts Glenn Hegar in August 2022 first listed 10 firms and more than 340 individual funds that “boycott energy companies,” a designation that compels state-run entities like pension managers to sell their holdings. Those companies included investment giant BlackRock Inc. as well as UBS Group AG, which have both said they don’t boycott energy companies. The list was updated in March, to add HSBC Holdings Plc.
A spokesman for HSBC said that the bank doesn’t consider itself to be boycotting the financing of energy companies, and that it looks to balance its approach to implementing a net zero commitment, “with the primary aim being to support our customers in the transition from a high-carbon to a low-carbon economy.” UBS declined to comment. A spokesperson for BlackRock didn’t immediately respond to requests for comment.
To some, the decline in sales volume is welcome.
“This represents a material shift in the conversation around ESG,” Texas Comptroller Hegar said in an emailed statement. “The shine is wearing off as Americans discover that ESG investments are not only failing to deliver the financial returns that their proponents promised, but also simultaneously distorting the free market incentives that actually might move the needle on some of the policy objectives that ESG investments supposedly support.”
Money managers themselves are also increasing their scrutiny of some ESG bonds, fearing that their benefits to the world may be overstated, known as greenwashing. That’s particularly an issue for sustainability-linked bonds, or SLBs, which can reward companies for meeting environmental goals by, for example, cutting their required interest payments, or punish them for failing to do so. Proceeds of the offerings can often be used for anything the company wants, instead of being tied to a particular projects.
The targets that companies identify for SLBs are sometimes easily achieved, and failing to meet goals can be hard to enforce. The bonds are an example of some of the most “egregious behavior” in the ESG market, Matt Lawton, T. Rowe Price Group Inc.’s portfolio manager for global impact credit strategy, said in September.
Global sales of SLBs fell roughly 24% to $25.3 billion in the first quarter, compared with $33.2 billion the same period last year, according to Bloomberg.
Companies, meanwhile, are taking note of the increased skepticism among investors. Verizon Communications Inc., a regular issuer in the ESG market, said in July that U.S. investors area “asking all the right questions” when it comes to green-bond sales as they become increasingly wary of greenwashing.
As relative investor demand has fallen, the so-called greenium, or the lower financing costs that companies can achieve by borrowing in the ESG market, has evaporated. As recently as June, the average yields-at-issuance for ESG-focused U.S. dollar-denominated high-grade portfolios stood at about 4.8%, compared with about 5.4% for non-ESG portfolios, according to Goldman Sachs Group Inc.’s analysis in January.
Those cheaper costs for borrowers came from investors seeking ESG debt for funds focused on that type of security. By November, both portfolios had a yield-at-issuance of roughly 6%.
In some cases, borrowers have to offer a higher interest rate on average to sell ESG debt than if they were selling traditional debt, according to a separate analysis by BloombergNEF.
The price advantage of issuing ESG debt has always been pretty minimal historically.
“But if you have companies that are serious about this, CFOs that are all about doing what we believe is fundamentally the right thing to do, the politics are not going to impact those kind of commitments,” said Kevin Berryman, president and chief financial officer at Jacobs, a consulting firm that issued its first SLBs through a unit in February.
—With assistance from Daniel Covello, Danielle Moran and Saijel Kishan.
This article was provided by Bloomberg News.