LONDON (Reuters) – The bond market for companies that meet certain environmental targets could increase 20-fold this year to between $ 120 billion and $ 150 billion, a senior banker at JP Morgan said, as companies seek to capitalize on booming demand.
COVID-19 has spurred interest in companies that perform well on environmental, social and governance (ESG) goals, as it has led to an assessment of how economies are expected to look in the future, increasing the volume of green and social bonds sold to raise new funds.
Most ESG bonds issued in recent years require the issuer to devote the proceeds to specific projects.
But sustainability bonds (SLBs) allow companies to raise funds for general purposes while promising investors that if they don’t meet set sustainability goals – such as reducing carbon emissions – they will pay investors more.
Marilyn This, Global Head of Developed Capital Markets ESG (DCM) at JP Morgan and an influential voice in the fast growing market, said that SLBs are an effective way for companies to show their commitment to an ESG goal without lifting funds for specific projects.
“I call for the SLB market to grow to around $ 120 billion to $ 150 billion since the inception of the market, and I think we will get it this year,” This said, noting that the SLB issuance since its inception. creation was around $ 20 billion. Year-to-date volumes have stood at around $ 6.9 billion.
“I am getting more and more calls from investors saying they want more SLB, that they like the holistic approach and that they like the skin of the game.”
SLBs are relatively new and investors are less familiar with them than green bonds. The process of companies paying penalties for not meeting sustainability goals they set themselves is also largely untested.
Global green bond issuance could reach $ 400 billion to $ 450 billion this year, up from nearly $ 270 billion last year, estimates the Climate Bonds Initiative.
This, who co-authored the Green Bond Principles on Voluntary Industry Best Practice Process Guidelines, expects the overall green, social and sustainable bond market to grow 49% this year to around 690. billions of dollars.
Italy’s Enel issued the first sustainability bond in 2019 worth $ 1.5 billion. In September, Brazilian pulp and paper producer Suzano’s sold a $ 750 million carbon bond.
Pharmacist Novartis, luxury brand Chanel, supermarket operator Tesco and retailer H&M have also issued SLBs recently.
The growth of sustainable bonds is also fueled by clearer rules on what they are. The European Central Bank said in September that it would accept green bonds as collateral with payments tied to sustainability goals from 2021.
“One unknown is whether a ruler will adopt a sustainability bond, that will be very interesting to see,” said This.
Neha Coulon, Global Head of ESG Solutions at JPMorgan, noted that demand for sustainable products is reflected in leveraged loans.
She said the first two months of 2021 saw eight sustainability-linked loans in the European leveraged loan market compared to around seven in 2019 and 2020.
Speaking to Reuters ahead of this week’s JPMorgan global ESG conference, This and Coulon said COVID-19 has proven to be a stress test for ESG.
Chart: Asset flow to ESG funds in total –
“It was the first stress test for ESG investing and one of the historical criticisms was that ESG investing hadn’t gone through a full economic cycle so that we understood how nice it was to have, or if it really significantly reduced the risk and added alpha, ”Coulon said.
Increased engagement in the United States due to the increase in traditional investors integrating ESG objectives into broader investment policies has also contributed to the growth, This said.
Reporting by Dhara Ranasinghe; Editing by Emelia Sithole-Matarise