ESG bond issuance headed for a slump in US, Goldman says

ESG bond issuance headed for a slump in US, Goldman says
There's likely to be just $40 billion of corporate-grade ESG debt issued in the U.S., which is half what U.S. companies issued last year.
OCT 06, 2023
By  Bloomberg

Companies based in the U.S. are on track to halve the amount of ESG-labeled debt they issue this year, marking a clear departure from the trend on the other side of the Atlantic, according to an analysis by Goldman Sachs Group Inc. 

The U.S. slump reflects the different regulatory set-ups in the two regions, said Goldman analysts including Michael Puempel and Sienna Mori. In Europe, rules have driven the supply of debt that incorporates environmental, social and governance goals. In the U.S., meanwhile, utility and energy sectors, as well as the financial firms backing them, have retreated from the ESG bond market.

The development follows more than a year of political attacks against ESG in the U.S., with high-profile Republicans such as Florida Gov. Ron DeSantis, a presidential hopeful, seeking to vilify the investment strategy as “woke” and anti-American. Combined with the fallout from an energy crisis that’s driven up fuel costs and led Big Oil to walk back green transition plans, U.S. issuers are cooling to green bonds. 

Meanwhile bonds of all stripes — whether they’ve got an ESG label or not — are feeling the effects of continually rising interest rates. This week, the 30-year Treasury yield rose above 5% for the first time since 2007, sending reverberations across equity and debt markets.

This year is likely to see just $40 billion of ESG corporate investment-grade issuance in the U.S. dollar market, according to the Goldman analysts. That’s half the amount issued by U.S. companies last year, and just 40% of the level reached in 2021, they said. The slump means that ESG-related issuance only accounts for 3% of total dollar-denominated supply in the investment-grade market, Goldman estimates. 

That’s “sharply down” from levels seen in previous years, when the relative share was double that, Puempel and Mori said.

Adding an ESG label to a bond is unlikely to improve its performance, according to the Goldman analysts. That said, there’s also no observable underperformance associated with labeling a bond ESG, they noted.

The findings fit broadly with an analysis by the European Securities and Markets Authority published Friday, with ESMA noting that it “cannot confirm a systematic pricing benefit for any ESG-labeled debt type as of March 2023. However, issuers of ESG bonds did benefit from a statistically significant pricing in the past driven by their issuer-level ESG credentials.”

In Europe, companies’ investment-grade ESG issuance has “held up better,” the Goldman analysts said, with the overall level of supply on track to reach €140 billion ($147 billion) this year.

Globally, ESG fixed-income funds have continued to attract client flows, with the 5.5% increase over the period beating the 3.6% seen among their non-ESG equivalents, Goldman said.

“In our view, these inflows are growing evidence that this investment style continues to gain traction as investors look for potential ways to play the energy transition theme as well as invest according to other potential ESG-related objectives,” Puempel and Mori said.

The Goldman analysis matches the picture painted by data from Morningstar Direct, which show that despite the political headwinds, more ESG funds are being launched than liquidated. Globally, 90 ESG funds were closed so far this year, while 253 were opened. Even in the U.S., 25 more ESG funds were created than were shuttered, according to the data.

High-yielding, ESG-friendly water stocks offer more than just liquidity

Latest News

Farther debuts AI investment proposal tool for advisors to win clients
Farther debuts AI investment proposal tool for advisors to win clients

"Im glad to see that from a regulatory perspective, we're going to get the ability to show we're responsible [...] we'll have a little bit more freedom to innovate," Farther co-founder Brad Genser told InvestmentNews.

Barred ex-Merrill Lynch advisor arrested in alleged $2.6M theft of former Miami Dolphin Pro Bowler
Barred ex-Merrill Lynch advisor arrested in alleged $2.6M theft of former Miami Dolphin Pro Bowler

Former advisor Isaiah Williams allegedly used the stolen funds from ex-Dolphins defensive safety Reshad Jones for numerous personal expenses, according to police and court records.

Are you optimally efficient?
Are you optimally efficient?

Taking a systematic approach to three key practice areas can help advisors gain confidence, get back time, and increase their opportunities.

Advisor moves: Father-son duo leaves Raymond James for LPL, RayJay adds Merrill Lynch alum in Florida
Advisor moves: Father-son duo leaves Raymond James for LPL, RayJay adds Merrill Lynch alum in Florida

Meanwhile, Osaic lures a high-net-worth advisor from Commonwealth in the Pacific Northwest.

Beacon Pointe adds six RIAs in two-month acquisition spree, boosting AUM by $2.7B
Beacon Pointe adds six RIAs in two-month acquisition spree, boosting AUM by $2.7B

The deals, which include its first stake in Ohio, push the national women-led firm up to $47 billion in assets.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.