BofA Sees Strong Growth in ESG Debt Next Year Despite ‘Pains’

(Bloomberg) -- Bank of America Corp., the biggest corporate issuer of bonds tied to environmental, social and governance in the U.S., is predicting another big year for global sales of the debt.

Issuance of sustainable bonds from corporations and governments worldwide surpassed $1 trillion for the first time ever this year, more than double all of 2020 issuance. The market is poised to grow at a significant pace next year as well, according to Andrew Karp, head of global corporate and investment banking ESG advisory and financing solutions at BofA and Karen Fang, the bank’s global head of sustainable finance.

“Will ESG primary issuance market double again in 2022? We’re not making that prediction,” Fang said in an interview Monday. “But we do think it will grow very, very strongly given the momentum behind global net zero transition and investor demand.”

The bankers said they expect more companies will issue sustainability-linked bonds, which penalize firms with higher borrowing costs if they don’t meet certain ESG metrics. Issuance of the bonds has surged to a record $107 billion so far this year, compared to just $11 billion issued for all of 2020, according to data compiled by Bloomberg. That’s despite criticism that some issuers are setting overly soft goals known as key performance indicators, or KPIs. 

“It’s a fast growing market. And a fast growing market has growing pains,” Fang said, noting that issuance of sustainability-linked loans will also increase. KPIs have to be “legitimate and credible” for the entire market to expand, she added.

Bank of America, for its part, has so far issued about $11.9 billion in different ESG debt labels since it started tapping the market -- one of the fastest growing across fixed income -- in 2013, making it the biggest issuer of the bonds among U.S. corporate and financial issuers, Bloomberg compiled data show.

The bank earlier this month issued $2 billion of sustainability debt, its second such offering. Proceeds will be used to fund both green and social projects, including affordable housing, access to essential health services, renewable energy, clean transformation, sustainable water and waste management and green buildings among other initiatives, according to a filing. The offering, which settled last week, received strong reception from both U.S. and global investors, Karp said.

 “It was encouraging to see and allowed us to price a successful transaction,” he said.

Karp said he expects “ongoing growth” particularly in the sustainability-linked debt and the ability for a larger client base to access the market. Assets are also growing faster than the market, which means there will be more demand, better pricing and more activity overall, he added. 

A supply and demand imbalance is allowing borrowers to effectively cut borrowing costs and that is expected to continue. Bank of America is forecasting overall investment-grade issuance will be down and ESG-lined debt to be up next year.

“These instruments will continue to price favorably until every issuance in the market is ESG,” Fang said.

Related: Bonds Linked to Good Deeds Lure Yield Chasers Indifferent to ESG

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