BBVA has published a new report on the ESG bond market, “ESG Bonds: Key topics and trends for 2019 and beyond – Getting the harmony right”.
According to BBVA, issuance of ESG bonds in 2019 has been above the monthly average of the previous three years, with May seeing a record of USD35bn of new issues and 6.7% of total bond issuance being labelled either green, social or sustainable. Meanwhile, Europe is leading the way on green bond market harmonisation, says the report.
The European Commission’s High-Level Expert Group on Sustainable Finance has been crucial in laying out standards and guidelines for how European issuance of ESG bonds can be further harmonised. Also, the EU’s Technical Expert Group on Sustainable Finance has provided ESG bond market participants with a comprehensive classification of 76 economic activities from seven industry sectors. BBVA says key topics in the ESG bond market are:
- ‘Greenium’ concept: The presence of a ‘greenium‘ would suggest that bonds labelled as green, social or sustainable would trade at tighter levels than those of conventional (read: ‘brown’) bonds. Greenium is an important concept, as the potential for issuers to gain a clear economic benefit from issuing green bonds, as opposed to non-green, will be a key driver for the growth of the market. Alas, as it stands, there is no such clear economic incentive.
- Additionality effect to issuing ESG bonds: Some experts argue that there is no additional benefit to issuing a green-labelled bond than a traditional one. BBVA analysts’s view is that green bond issuers provide investors with greater clarity due to greater reporting requirements, the alignment of the wider issuers corporate strategy with various environmental targets, and increasing market participation from investors, other issuers, central banks, regulators etc.
- PG&E example serving as a cautionary tale: US utility company PG&E (Pacific Gas and Electric Company) filed for bankruptcy in January 2019 as a result of an estimated USD30bn of liabilities arising from wildfires in 2017 and 2018, the starting of which had been linked to the company’s equipment. This was the first recorded bankruptcy that has been linked to climate change factors. As a consequence, the investors are now demanding more transparency regarding ESG risks in order to be able to gauge their exposure more efficiently.
- Millennial generation driving socially responsible investment: A study released by First State Investments, in conjunction with Kepler Cheuvreux, detailed to what extent the ‘millennial’ generation is actively engaged with socially responsible investing. 81% of the sample were either ‘interested’ or ‘very interested’ in the concept of investing in socially responsible or sustainable investments.