ESG bond sales hit a low as US companies retreat, facing political pressure and investor
US companies and banks are showing less interest in selling environmental, social, and governance (ESG) bonds, according to BNN Bloomberg.
These bonds, designed to fund companies' environmental projects or encourage better governance and social goals, have seen a significant drop in sales this year.
By August 16, US-based companies sold only US$18.2bn of ESG debt, the lowest since 2019’s US$12.5bn. This decline contrasts with the rising sales of other investment-grade corporate debt.
Several factors contribute to this trend. Republican politicians in states like Texas and Kansas have tried to prevent government entities from considering ESG issues when purchasing securities.
Additionally, more investors are questioning the effectiveness of these bonds, suspecting they may contribute to greenwashing. Furthermore, US ESG-related funds have underperformed, returning 14 percent on average this year, lagging behind the S&P 500 index.
This shift marks a significant change from a few years ago, when demand for sustainable debt surged following the COVID-19 pandemic and social unrest after George Floyd's death. In 2021, companies issued a record US$94.5bn in ESG bonds.
The politicization of ESG debt has also eroded the price advantage issuers once enjoyed.
The so-called ‘greenium’—the spread between green bonds and non-green bonds—has diminished in the US high-grade market, reducing investor interest and making it less attractive for US companies to issue these bonds.
Debut issuers, who played a crucial role in the ESG market’s growth during the pandemic, are now pulling back.
First-time issuers face the burden of drafting a bond framework, verifying it with third parties, and reporting annually on the use of proceeds, which has led many CFOs to prioritize simpler, more straightforward funding options, especially amid concerns about market volatility and central bank rate hikes.
The six largest US banks, once regular issuers of ESG bonds, have also retreated. Last year, they collectively raised US$3.2bn in ESG debt, the lowest volume since 2018.
In 2023, Citigroup Inc. was the only major Wall Street bank to issue a benchmark-sized ESG bond, while Bank of America Corp., the largest corporate issuer of US ESG bonds, last issued one in June 2023, but in the European high-grade market.
Bank of America has acknowledged that its sustainable bond offerings typically align with its overall debt issuance, which has been steadily declining. However, not everyone sees a bleak future for the US ESG debt market.
Emily Kreps, global head of ESG and sustainable finance at Deutsche Bank AG, believes that while the market may evolve and differ from its global peers, it will not disappear. She suggests that sectors with traditionally high emissions may increasingly pursue financing linked to transition innovation.
Globally, the ESG bond market is still thriving. As of August 16, global sales of ESG bonds exceeded US$660bn, up 6.9 percent compared to the same period last year. This growth is driven by sovereign issuers, including nations selling these bonds for the first time.
In Europe, which leads the sustainable debt market, green corporate bonds have gained 2.5 percent this year, nearly matching the 2.4 percent gain for plain vanilla debt.
Despite this global momentum, companies like Irish building materials firm CRH Plc remain hesitant to issue ESG bonds, citing a lack of financial incentives.
“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 contacted numerous US-based companies that have issued ESG bonds in the past, including the six largest banks, Apple Inc., Amazon.com Inc., Mastercard Inc., and Walmart Inc.
Most declined to comment or did not respond, with only Bank of America, Prologis, and CRH providing input for this story.
