Why ESG Bond Supply Stagnates Globally: Unraveling the Factors

What can explain stagnating ESG bond supply across the globe?

We have been used to seeing green, social, sustainability and sustainability-linked bonds to expand their footprint over the years. The reality is that, despite robust demand from investors, ESG bond supply also responds to external challenges:

• Projects pipeline: Corporates’ ESG issuance was extremely strong in 2021 and 2022, with a notably lower interest rate environment boosting bond supply. Corporates need the time to allocate the proceeds to new green projects. 2023 and 2024’s ESG issuance, therefore, suffers from the existing projects pipeline.
• Higher costs: The Covid-19 pandemic, the post-pandemic recovery and the war in Ukraine all led to hyperinflation. Higher costs of materials, higher funding costs and supply chain disruptions have resulted in delayed and sometimes cancelled projects, as seen within the utilities sector.
• Lower capital expenditure: With higher interest rates and higher costs of materials, most sectors have curbed their capital expenditure ambitions in 2023 (although they are still growing vs. 2022). This is particularly the case for the real estate sector, which has concentrated its efforts on balance sheet management in an environment where asset valuations were negatively impacted. Globally, for most industries, next year will see another capex growth reduction compared to 2023.
• Slower lending growth: Bank lending growth is stagnating against the backdrop of the rise in interest rate levels. This makes it difficult for banks to grow their sustainable loan portfolios substantially. That said, against the backdrop of evolving ESG regulation and a wider investor and societal push for companies and banks to become more sustainable, the sustainable loan books will still see better growth dynamics than the less sustainable loan portfolios.
• Inflows into ESG funds: Counterbalancing the negative elements cited above, demand for ESG bonds continues to be strong. We have seen continuous inflows into ESG funds, adding further demand for ESG products. From October 2022 to October 2023, flows into EUR IG ESG accumulated to c.13%. Additionally, during times of outflows from credit, ESG funds generally remain positive.

New initiatives to prevent greenwashing in 2024

Sustainability financial products and markets have grown remarkably over the years. Several measures have been deployed by the European Union to ensure market integrity, investors’ protection and a trusted environment for sustainable investments. Greenwashing allegations have been growing in numbers, targeting both financial and non-financial entities. This has also resulted in the increasing attention of securities markets’ regulators to this phenomenon. Industry players and retail investors also seem to share the concern that greenwashing risks have increased.