A $180 Billion Green-Debt Boom Grows Faster Than Its Impact
Greg Ritchie and Priscila Azevedo Rocha
Wed, December 22, 2021
(Bloomberg) -- The green debt market is growing at a faster pace than the real-world projects it was created to support, thanks to some financial engineering.
While no official estimate exists for the difference between green finance and actual green business, a growing chorus of auditors, researchers and climate activists warn that the numbers provided by bankers offer an exaggerated picture of their role in fighting climate change.
“Financial institutions can paint a picture of themselves which makes their contribution to the climate transition more meaningful than it actually is,” said Stanisław Stefaniak, a sustainable finance researcher at the Warsaw-based think-tank Instrat.
The concern centers on the reselling of green loans, whereby the finance industry’s contribution to an underlying project gets counted as often as the original debt is refinanced. After issuing green loans, bankers can bundle them into a green bond that can then be sold on to another financial institution. Both can claim they are financing the climate transition.
The accounting conundrum means the amount of green financial assets on banks’ and asset managers’ balance sheets outstrips real-world green capital expenditures. This year, financial institutions printed a record $180 billion in green bonds, more than any other private sector.
“It is difficult to put a number on the level of double counting that will happen due to the private nature of the loan market,” said Maia Godemer, a sustainable finance analyst at BloombergNEF. The “caveat,” however, is that we risk ending up with a “brighter picture about the actual decarbonization that is enabled by credit institutions,” she said.
The repackaging and restructuring of debt is a well-established and fully legal form of financial engineering. Though there are examples to show that such models can backfire if applied without restraint -- the subprime mortgage meltdown being a case in point -- rebundling debt can also add liquidity and bring more stakeholders into a market to help it grow.
Since banks are under pressure from regulators, particularly in Europe, to make their lending greener, this kind of refinancing serves them well. But the disconnect from actual green business may complicate efforts to track their contribution to the urgent decarbonization needed to avoid a climate catastrophe.
“If the bank has a legitimate exposure that it is able to report but then sells or repackages the loan, there is a risk that the purchaser getting the credit could be viewed as benefitting from financial engineering as opposed to representing the sustainable money going into the real economy,” said Tim Conduit, a partner at Allen & Overy. “It is a question of how the different green exposures are reported.”
Policy makers are starting to counter this potential for greenwashing in the debt market. Proposed amendments to the European Union’s green bond standard include a clause that would prevent “the creation of green bonds out of thin air” by continuous refinancing, according to Paul Tang, a lawmaker responsible for guiding the legislation through the European Parliament.
Wes Bricker, who co-leads PwC LLP’s trust solutions practice, says that if the EU’s goal is to use the green asset ratio reported by banks “to identify the volume of investment into green projects so that policy makers and society can understand if we are transitioning at a sufficiently rapid pace, we can get an inaccurate signal by inflating.”
“It depends on what we want from that number, who is using it and for what purpose,” Bricker said.
Even established asset classes such as green bonds have a questionable climate impact. They often provide money to refinance completed green projects and the label doesn’t oblige the issuer to use the freed-up capital on another green project. And this year saw the emergence of green derivatives and repos, which regulators have warned may be prone to greenwashing as they race to design a rulebook for such products.
The EU’s regulatory packages are global in scope, and affect non-EU firms if they target clients in the bloc. The idea is to steer capital away from activities that hurt the planet and into projects that protect the environment and social justice.
Frédéric Hache, who heads the Brussels-based Green Finance Observatory, says European policy makers should be guided by the vision articulated during the climate summit in Scotland last month. He proposes that any bank refinancing its green loan book via green securities not count the loans toward its green asset ratio.
“COP26 has recently highlighted the crucial importance of avoiding the double counting of carbon credits for environmental integrity and credibility purposes,” he said. “The same applies to green claims.”
Runaway ESG Debt Issuance Poised for Fresh Boost From Junk Sales
Caleb Mutua and Olivia Raimonde
Thu, December 23, 2021
(Bloomberg) -- Investors racing to buy debt tied to environmental, social and governance goals are expected to propel issuance to fresh highs next year, boosted by leveraged finance.
Sales of green, social, sustainability and sustainability-linked bonds from corporations and governments worldwide surpassed $1 trillion for the first time this year. Underwriters of the bonds and loans, who’ve been on a hiring spree to keep up with demand, are braced for another surge.
A 50% increase in sustainable bond issuance is possible in 2022 and high yield has “a lot of room to run,” according to Amanda Kavanaugh, head of sustainable financing for the Americas at Mitsubishi UFJ Financial Group Inc.
The Japanese lender also expects a rise in sustainability-linked leveraged loans next year. “There is going to be a significant uptick,” Kavanaugh said.
Citigroup Inc. has a “pretty healthy” pipeline of sustainability-linked bonds for the first-quarter, said Philip Brown, managing director of global sustainable debt capital markets. Brown projects about $1.3 trillion in global sales of green, social, sustainability and sustainability-linked bonds alone next year, including more junk and emerging market issuance.
“Many corporations across sectors are making commitments to sustainability and that is going to precipitate further issuance,” said Brown in a telephone interview Dec. 10. “We see larger order books, a greater degree of oversubscription and therefore a greater price tension.”
Brown expects a two-to-three basis points pricing advantage -- a so-called greenium -- for issuers on average across most sectors in 2022, allowing them to cut borrowing costs. Citi is the third largest underwriter of green bonds, according to Bloomberg data.
Read more: BofA Sees Strong Growth in ESG Debt Next Year Despite ‘Pains’
BNP Paribas SA, the second biggest underwriter, foresees a busy January, boosted by Latin American issuers that had been waiting for a window to sell labeled bonds abroad, Anne van Riel, head of sustainable finance capital markets for the Americas at BNP, said in a telephone interview on Dec. 3.
Inflection Point
BNP expects sales of green bonds alone to hit a record $880 billion by the end of 2022. That’s up from $505 billion issued this year, according to data compiled by Bloomberg.
Morgan Stanley estimates $750 billion to $950 billion of green bonds, driven by the European Union. That would include 238 billion euro equivalent from the EU’s NextGeneration Green Bond program.
France meanwhile plans net bond issuance of 260 billion euros that will include two new 10-year benchmarks. It’s also considering a rare inflation-indexed green bond.
“We think we will get pretty close to $1 trillion mark just on green alone next year. This is going to be the inflection point year,” Trevor Allen, sustainable research analyst at BNP, said in a telephone interview Dec. 3.
Barclays Plc projects around 40% of Euro-denominated investment-grade issuance to come with an ESG label, 14% of dollar high-grade debt and 33% of the sterling market.
Significant growth in sustainability-linked bonds, which hike borrowing costs if borrowers don’t meet specified targets, is also expected.
Barclays expect SLB volume to overtake use-of-proceeds bonds in 2023. “Theoretically all bonds issued could come in a sustainability-linked structure,” strategists led by Charlotte Edwards wrote in a note earlier this month.
Read more: Sustainability-Linked Bond Issuance Hit Record High in November
Greenwashing Hazard
Even if there’s another issuance surge, it probably won’t be enough to satisfy demand. Global sustainable fund assets almost doubled from March to September, to $3.9 trillion, boosted by new disclosure rules in Europe, according to Morningstar. Sustainable fixed income funds pulled in $35 billion during the third quarter, up from about $20 billion in the corresponding period of 2020.
Excess cash will keep costs in borrowers’ favor. It could also give companies an incentive to misrepresent or inflate sustainability claims, according to James Rich, a senior portfolio manager at Aegon Asset Management.
“Investors are definitely getting better at scrutinizing labeled bonds, which is helpful,” said Rich in an interview. “But until that greenium closes, there is a financial incentive to greenwash.”
Meanwhile, pressure is increasing on managers of ESG-labeled investment funds to show they’re being truthful with customers about what they’re selling. Europe enforced its Sustainable Finance Disclosure Regulation in March -- an ambitious framework designed to fight greenwashing -- and is working on substantial updates.
In the U.S., the Securities and Exchange Commission is planning rules that require corporations to publicly disclose risks from climate change.
“Investors will always need to have their guard up a bit, as what constitutes being a ‘green’ project is subjective and even varies by geography,” said Lisa Abraham, senior ESG fixed income research analyst at Brown Advisory.
There are also doubts as to whether sustainable finance has any real impact on the environment or society, according to Bradford Cornell, emeritus professor of finance at UCLA Anderson School of Management.
“Wall Street can make more fees by doing that,” he said, referring to underwriting ESG-linked debt. “I don’t think it has much social benefit, but if they can sell more that way, they’re going to do it,” Cornell said in a Dec. 10 phone interview.
Caleb Mutua and Olivia Raimonde
Thu, December 23, 2021
(Bloomberg) -- Investors racing to buy debt tied to environmental, social and governance goals are expected to propel issuance to fresh highs next year, boosted by leveraged finance.
Sales of green, social, sustainability and sustainability-linked bonds from corporations and governments worldwide surpassed $1 trillion for the first time this year. Underwriters of the bonds and loans, who’ve been on a hiring spree to keep up with demand, are braced for another surge.
A 50% increase in sustainable bond issuance is possible in 2022 and high yield has “a lot of room to run,” according to Amanda Kavanaugh, head of sustainable financing for the Americas at Mitsubishi UFJ Financial Group Inc.
The Japanese lender also expects a rise in sustainability-linked leveraged loans next year. “There is going to be a significant uptick,” Kavanaugh said.
Citigroup Inc. has a “pretty healthy” pipeline of sustainability-linked bonds for the first-quarter, said Philip Brown, managing director of global sustainable debt capital markets. Brown projects about $1.3 trillion in global sales of green, social, sustainability and sustainability-linked bonds alone next year, including more junk and emerging market issuance.
“Many corporations across sectors are making commitments to sustainability and that is going to precipitate further issuance,” said Brown in a telephone interview Dec. 10. “We see larger order books, a greater degree of oversubscription and therefore a greater price tension.”
Brown expects a two-to-three basis points pricing advantage -- a so-called greenium -- for issuers on average across most sectors in 2022, allowing them to cut borrowing costs. Citi is the third largest underwriter of green bonds, according to Bloomberg data.
Read more: BofA Sees Strong Growth in ESG Debt Next Year Despite ‘Pains’
BNP Paribas SA, the second biggest underwriter, foresees a busy January, boosted by Latin American issuers that had been waiting for a window to sell labeled bonds abroad, Anne van Riel, head of sustainable finance capital markets for the Americas at BNP, said in a telephone interview on Dec. 3.
Inflection Point
BNP expects sales of green bonds alone to hit a record $880 billion by the end of 2022. That’s up from $505 billion issued this year, according to data compiled by Bloomberg.
Morgan Stanley estimates $750 billion to $950 billion of green bonds, driven by the European Union. That would include 238 billion euro equivalent from the EU’s NextGeneration Green Bond program.
France meanwhile plans net bond issuance of 260 billion euros that will include two new 10-year benchmarks. It’s also considering a rare inflation-indexed green bond.
“We think we will get pretty close to $1 trillion mark just on green alone next year. This is going to be the inflection point year,” Trevor Allen, sustainable research analyst at BNP, said in a telephone interview Dec. 3.
Barclays Plc projects around 40% of Euro-denominated investment-grade issuance to come with an ESG label, 14% of dollar high-grade debt and 33% of the sterling market.
Significant growth in sustainability-linked bonds, which hike borrowing costs if borrowers don’t meet specified targets, is also expected.
Barclays expect SLB volume to overtake use-of-proceeds bonds in 2023. “Theoretically all bonds issued could come in a sustainability-linked structure,” strategists led by Charlotte Edwards wrote in a note earlier this month.
Read more: Sustainability-Linked Bond Issuance Hit Record High in November
Greenwashing Hazard
Even if there’s another issuance surge, it probably won’t be enough to satisfy demand. Global sustainable fund assets almost doubled from March to September, to $3.9 trillion, boosted by new disclosure rules in Europe, according to Morningstar. Sustainable fixed income funds pulled in $35 billion during the third quarter, up from about $20 billion in the corresponding period of 2020.
Excess cash will keep costs in borrowers’ favor. It could also give companies an incentive to misrepresent or inflate sustainability claims, according to James Rich, a senior portfolio manager at Aegon Asset Management.
“Investors are definitely getting better at scrutinizing labeled bonds, which is helpful,” said Rich in an interview. “But until that greenium closes, there is a financial incentive to greenwash.”
Meanwhile, pressure is increasing on managers of ESG-labeled investment funds to show they’re being truthful with customers about what they’re selling. Europe enforced its Sustainable Finance Disclosure Regulation in March -- an ambitious framework designed to fight greenwashing -- and is working on substantial updates.
In the U.S., the Securities and Exchange Commission is planning rules that require corporations to publicly disclose risks from climate change.
“Investors will always need to have their guard up a bit, as what constitutes being a ‘green’ project is subjective and even varies by geography,” said Lisa Abraham, senior ESG fixed income research analyst at Brown Advisory.
There are also doubts as to whether sustainable finance has any real impact on the environment or society, according to Bradford Cornell, emeritus professor of finance at UCLA Anderson School of Management.
“Wall Street can make more fees by doing that,” he said, referring to underwriting ESG-linked debt. “I don’t think it has much social benefit, but if they can sell more that way, they’re going to do it,” Cornell said in a Dec. 10 phone interview.
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