Why sustainable debt and ESG markets turned frosty in 2022

Through to November, sustainable debt issuance was $1.2 trillion, while last year, companies had raised $1.5 trillion

The pullback in sustainable debt issuance — across three types of bonds and two types of loans — has been universal. AP

In the past five years, the world’s sustainable finance markets have expanded from niche products a decade ago, to more than one and half trillion dollars of bonds and loans issued last year.

Investors have also allocated hundreds of billions of dollars to ESG-focused equity and debt exchange-traded funds. Sustainable finance is a growth market — or at least, it was until this year.

Through November of this year, sustainable debt issuance is just under $1.2 trillion. At the same time last year, companies had raised more than $1.5 trillion. The difference between this year and last is probably impossible to make up in December, which is traditionally a quiet month for issuance.

The pullback in sustainable debt issuance — across three types of bonds and two types of loans — has been universal. Every instrument has seen less issuance this year than last.

Sustainability-linked loans have done best, relatively speaking, with issuance down 11.8 per cent from a year ago. Social bonds, on the other hand, are at only about half the level of issuance as last year.

BloombergNEF analysis finds that the decline in social bonds is mostly due to their circumstantial nature — they are closely linked to issuer efforts to mitigate the impact of the coronavirus pandemic.

he two biggest categories in terms of total dollars issued, green bonds and sustainability-linked loans, are both off more than 20 per cent.

It is not just sustainable debt that is off last year’s marks. Exchange-traded funds with an environmental, social, and governance theme saw more than $130 billion dollars in capital flow in 2021, an increase of five times more than the inflows of just two years earlier.

This year, new investments may be less than $50 billion — not only well below 2021 but even below 2020.

Monthly inflows into ESG funds are down in 2022, compared with the previous two years. Inflows increased for six straight months at the end of 2020, to peak above $20 billion in January 2021. That figure is nearly half of 2022’s total inflows to date.

Also, fund inflows have fallen below $1 billion a month twice this year, a level not seen since the start of 2019.

Within that same month Elon Musk described ESG as a “scam” that “had been weaponised by phoney social justice warriors.” It was also a time, perhaps not coincidentally, when Google Trends showed peak interest in the term. As of December 12, Google searches for “ESG” is about equal to what it was in May.

The data doesn’t determine a path for the future. But, these are some possibilities. The first is that a continued effort to stigmatise ESG, in particular from US activist investors and politicians targeting large asset managers, leads to outright outflows in ESG-focused exchange-traded funds.

Not even the world’s biggest asset manager is immune at the moment, and its near-peer is leaving a significant global climate finance alliance. Others could follow suit under political and rhetorical pressure.

In Europe, efforts to quantify ESG and sustainable investing standards could alter fund allocation strategy in a major way as well. That “chill of realism,” as one London-based attorney described it, could impact about $4 trillion in assets and dampen investor enthusiasm for further allocation.

Sustainable debt markets could feel a little frostier thanks in large part to the disappearance of the “greenium” — or discount to conventional notes — that green bonds have enjoyed. Green bonds now issue at a premium to conventional notes, which makes them less attractive to issuers.

But at the same time, the next three decades will require between $120 trillion and $194 trillion of investment as the global energy system decarbonises. Many trillions of dollars’ worth of that demand will flow through sustainable debt markets.

Today’s market has good reasons for its chilly conditions. The long run, however, has many reasons for expansion.