ESG Bonds Offer Rare Bright Spot Next Year in Europe

Socially responsible bonds are one of the few areas of optimism amid generally downbeat outlooks for 2021 European credit sales.

Regional issuance of corporate bonds with environmental, social and governance labels may jump about 40% next year, according to NatWest Markets, avoiding a wider market hangover following 2020’s deluge of fundraising. The optimism reflects new bond types and regulatory support, as well as investor demand creating cost incentives for issuers.

“A lot of stars are aligned for this market,” said Arthur Krebbers, head of sustainability, corporates at NatWest Markets. Policy makers are “clearly very focused on growing the market for climate finance.”

A key step will be more governments following Germany in offering ESG sovereign bonds, as this can help educate the market and potentially create pricing benchmarks for corporates. Italy and Spain are among nations working on debut euro green bonds, and the U.K. is moving toward a green gilt in sterling. The European Union may also sell about 240 billion euros ($290 billion) of green bonds under a long-term stimulus program.

“The demonstration effect is really important,” said Farnam Bidgoli, HSBC Holdings Plc’s head of sustainable bonds. “It can definitely stimulate follow-on private sector issuance.”

This year, high-grade non-financial companies boosted syndicated sales of euro ESG bonds almost 20% to 31.1 billion euros, according to data compiled by Bloomberg. That was about in line with growth in their total single-currency syndications. Coronavirus upheavals dented ESG deals in the traditionally busier first half of the year, as companies focused on quicker and more flexible forms of financing.

READ MORE: Record-Breaking Euro Credit Sales to Cool After Virus Deluge

Market growth may come from sectors including consumer goods, industrials, energy and mining, Bidgoli said. Carmakers Daimler AG and Volkswagen AG paved the way this year with debut green bonds, which helped ease the sector’s traditional reliance on utilities, banks and real estate.

“The more, the merrier,” said Arnaud-Guilhem Lamy, who manages a 1.02 billion-euro green-bond fund at BNP Paribas Asset Management. “We want new sectors to come into the market.”

ESG Bonds Offer Rare Bright Spot Next Year in Europe

Newer types of notes are helping to drive diversification. Oil companies Eni SpA and Total SE have both said they are looking at transition bonds -- a so-far rarely used type that can help polluting industries pay for environmental improvements.

The tiny sustainability-linked bond market, which ties borrowing costs to ESG targets, has also started to gain some traction. Fashion house Chanel SA and LafargeHolcim Ltd. are among recent issuers, and the European Central Bank will start purchasing some next month.

Companies are selling ESG bonds for social kudos and to get lower borrowing costs. Corporate issuers have achieved a 7 basis-point pricing advantage this year versus conventional notes, according to BNP Paribas SA.

The discount reflects demand for ethical products and retaining investor trust is a key market challenge. That means delivering real environmental changes and avoiding greenwashing, or the exaggeration of project benefits.

“If outcomes disappoint, there could be a backlash,” according to a CFA Institute report.

New standards should help limit this risk including an EU green-bond taxonomy as well as industry frameworks for sustainability-linked and transition bonds. Consumer and regulatory pressure is also likely to help ensure compliance and further boost ESG bond sales.

“Sustainable European corporate bond issuance will stay busy next year,” said Maia Godemer, a research analyst for green and sustainable finance at BloombergNEF. “The overall optimism around the sector will be backed by demand from investors and stakeholders who expect companies to be socially and environmentally responsible.”

©2020 Bloomberg L.P.

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