JPMorgan Sees Dollar Sustainable Debt Eclipsing Euros Next Year

JPMorgan Chase & Co. expects 2021 to be the first time more green, social, and sustainability debt is sold in dollars than euros.

Europe has been the dominant market for green financing, helped by stricter emissions regulations and investors that have been much quicker and more aggressive in adopting environmental investing principles. However, issuance of environmental, social and governance bonds in dollars is gaining momentum with a broader swath of U.S. issuers and investors.

“Euros remain the main currency for sustainable funding for now, given the strength of European-based demand, but the current pace implies dollars may become the primary currency for sustainable financing in 2021,” JPMorgan analysts including Madhubala Sriram wrote in a Wednesday note. “An increase in U.S. dollar supply should render the asset class more popular with global investors that are largely dollar-centric in their asset and liability structure.”

Along with more dollar issuance, JPMorgan cites regulatory guidance and a fast increase in demand for dedicated ESG-mandated funds as fuel for growth. Issuers of the debt include both public and private entities, usually adhering to a green framework or some other guidance on what projects are considered eligible.

“With a Democratic administration likely incoming in 2021, we’d expect the focus on sustainable investing in the U.S. to increase further from here,” the analysts wrote.

Company Sales

The proportion of sustainable debt sales stemming from North American companies has jumped to 57% from 37% in the past two years, showing sustainable debt is no longer a “uniquely European phenomenon,” analysts wrote. Companies such as Alphabet Inc., which sold the largest corporate ESG deal in August, and Citigroup Inc. have sold the bonds, which are designed to fund projects that facilitate social change and improve the environment.

JPMorgan Sees Dollar Sustainable Debt Eclipsing Euros Next Year

Corporations and governments have raised a record $403.4 billion in green, social and sustainability bonds this year, compared to about $237 billion issued the same period a year ago, according to data compiled by Bloomberg.

JPMorgan Sees Dollar Sustainable Debt Eclipsing Euros Next Year

The sustainability-linked bond market, where pricing is linked to sustainability targets, “could be an enduring feature of the corporate sustainable financing market looking ahead,” said Sriram. HSBC Holdings Plc is also wagering that the nascent market will take off next year, aided by growing awareness and European Central Bank support.

More U.S. borrowers are issuing longer-dated ESG-linked bonds, another sign that the market is expanding its reach toward more domestic investors, the analysts wrote. While more than half of the dollar issuance was maturing in less than five years in 2018, most likely directed at European and other foreign buyers prevalent in the front-end of the curve, longer-term issuance made up two-thirds of the total dollar issuance this past year.

JPMorgan is a leading underwriter of the bonds, according to data compiled by Bloomberg.

“We think future growth in the market will be aided by an increasing pace of dollar involvement, regulatory guidance around taxonomy and structure, and a rapid increase in demand for dedicated ESG-mandate funds” Sriram wrote.

©2020 Bloomberg L.P.

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