Bank of England Starts Policing Unruly World of ESG Debt

(Bloomberg) -- The Bank of England will enforce its green criteria in corporate bond purchases for the first time, establishing a blueprint for investing in a part of the credit world rife with greenwashing.

Starting Wednesday, the London-based central bank will only buy bonds with public environmental, social, and governance goals that meet its standards, and will start scorecards that grade bonds by their issuers’ levels of emissions intensity, among other metrics. It’s a marked shift for the central bank, which already buys ethical assets, but doesn’t filter them based on the firm’s credentials.

The BOE will also publish a list of issuers whose bonds it holds, which, together with the scorecards, are meant to encourage and guide investors to “green their portfolios,” Governor Andrew Bailey said in a statement earlier this month. A spokesperson for the bank declined to comment further.

“This could be some kind of template” for investors, especially as demand from clients on how to make portfolios more environmentally-friendly grows,” said Paola Binns, a senior fund manager at Royal London Asset Management, which oversees 159 billion pounds ($212 billion).

For investors, the BOE’s screening process and the scorecards alleviates the burden of having to find and sift through information by themselves, a time-consuming and expensive process. That’s because, even though there are $13 trillion of outstanding corporate bonds, there’s a lack of standardization in the industry. Rating providers have yet to develop a uniform system to rank securities based on firms’ ESG goals, and whether they’ve met those targets.

Waiting for the ECB

The BOE is the first central bank to start scorecards, but it’s following in the footsteps of Sweden’s Riksbank, which this year started taking sustainability into consideration in its corporate bond purchases. The European Central Bank is expected to follow suit in its 307-billion-euro ($346 billion) -- and counting -- corporate sector purchase program next year. It has released a road map of climate change-related actions that includes concrete proposals for alternative benchmarks in the corporate sector purchase program in 2022.

The ECB has already shown signs of supporting the sustainable transition by adding sustainability-linked bonds to the list of QE-eligible securities at the start of the year. A spokesperson at the ECB declined to comment.

“The positive outcome would be that the ECB directly speaks to the corporate community, tells them ‘this is what we expect from you, this is the level of detail we need to be able to continue buying’,” said Tatjana Greil Castro, a portfolio manager at Muzinich & Co. and a member of the European Central Bank’s Bond Market Contact Group. Her employer has been advocating for central banks to take a lead in ESG investment decisions since at least 2019.

Responsibilities Remain

Central bank action, however, doesn’t absolve investors from having to do their homework on corporates’ ESG credentials. Ultimately, it’s their portfolio, said Ronald van Steenweghen, a portfolio manager at Degroof Petercam Asset Management (DPAM), which oversees 47 billion euros.

He sees the BOE encountering the same struggles that money managers face when trying to gather ESG-related data from companies.

Still, central banks play an important role in a market where best practices are an ever-changing concept, with multiple taxonomies of sustainable investments cropping up, and the International Financial Reporting Standards Foundation only recently creating a sustainability standards board.

“The ESG market, in particular the green bond one, is still young and rules are changing,” said Matteo Merlin, head of green and sustainable finance at Eurizon Asset Management, which oversees 432 billion euros. “Central banks are right to try to steer market in the right direction.”

EMEA

Eleven issuers are looking to raise at least 4.94 billion euros across 11 tranches.

• Traders and economists are convinced that the Bank of England will increase interest rates in December for the first time since the pandemic began, but students of the central bank’s history may harbor more doubts
• The Turkish lira’s freefall is shattering all kinds of records as President Recep Tayyip Erdogan’s intensifying campaign for lower interest rates plunges the country deeper into crisis.

Asia

At least three investment grade issuers sought to price new dollar offerings on an active day for Asia’s primary dollar bond market, while investors remained cautious on China’s riskier offshore dollar debt amid concerns over a liquidity crisis in the property industry.

• China Everbright Bank HK Branch and East Money are pricing USD bond deals, while Ningbo Haishu Development is marketing a USD bond
• Yields on a Bloomberg index of Chinese non-investment grade notes saw their biggest gain in a week on Tuesday, jumping 22 basis points to about 19.5% as a report that China Aoyuan Group failed to pay a loan product in full reignited concerns about financially stressed developers.

America

Over $56 billion priced last week, an extraordinarily high amount for investors to absorb prior to the holiday

• IT services company CDW squeezed a U.S. high-grade bond sale through the primary market before the doors closed for the U.S. Thanksgiving holiday, bucking a recent trend of mixed new issue results by performing well through syndication.
• U.S. ABS sales surpassed the $300 billion mark on Monday, according to data compiled by Bloomberg News. Deals were priced for Continental Finance and first-time issuer Self Esteem Brands. Channel Partners has started pre-marketing an inaugural small business ABS. Guidance has also been issued on a debut prime auto offering from Waterfall Asset Management.

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