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Good sign: People reflected by the Morgan Stanley building in New York. The lender has been involved in 3.4% of the US$531.7bil in sustainable bonds issued by corporations and governments. — ReutersNEW YORK: The US backlash against investment strategies that incorporate environmental, social and governance (ESG) issues is forcing borrowers to be more thorough when labelling bonds, a positive development for the US$6 trillion (RM28 trillion) ethical debt market, according to Morgan Stanley.
“To some extent, some US issuers are more trepidated because of the pushback,” said Melissa James, vice-chairman of global capital markets at the New York-based lender.
“Had things gone unfettered, it would’ve gotten a little too frothy. The market is maturing.”
Growing scepticism about the validity of ESG investments in the United States – driven largely by leading Republican politicians – is making investors rethink how they embed sustainability factors in their bond funds.
There are fewer money managers saying that sustainability is a fund objective, according to a HSBC Holdings Plc survey conducted from May 31 to June 24.
Meanwhile, others stick with the strategy but avoid the “ESG” acronym, according to a second-quarter survey of roughly 300 Bloomberg terminal users.
The so-called greenium, which refers to the price advantage that companies can reap when borrowing in the ESG market, has largely evaporated amid the political pressure, hurting sales of the bonds in the United States.
Corporations have raised about US$31bil in dollar-denominated ESG bonds this year through Aug 17, a 53% slump from the same period last year, according to data compiled by Bloomberg.
“The greenium is pretty modest but we’re still seeing very strong interest in ESG labelled debt that’s well structured,” James said.
Morgan Stanley has been involved in 3.4% of the US$531.7bil in sustainable bonds issued by corporations and governments so far this year, making it the seventh-biggest underwriter of the debt, according to data compiled by Bloomberg.
The lender has a “decent pipeline” of potential first-time issuers looking to bring new deals, said James.
“Some of them could come this year and there’s a stronger pipeline going further out looking at 2024,” said James, who oversees the ESG efforts of the global capital markets division.
Global sales of green bonds, the largest category of sustainable debt by amount, are booming this year. BNP Paribas SA, the biggest underwriter of the bonds, is predicting a record year for the label, which James said is a possibility.
Issuance of sustainability-linked bonds (SLBs) – a type of instrument that’s been heavily criticised by investors – is also rebounding.
SLBs tie interest payments to a company’s environmental or social goals.
Proceeds from those transactions can be used to fund just about anything as long as issuers pledge to meet certain ESG targets known as key performance indicators, or KPIs.
“The interest is there as long as the KPIs are perceived as being sufficiently ambitious and there’s integrity to the structure,” said James.
“The SLB label is going to survive. In fact, it is emerging as the de-facto transition instrument.”
Morgan Stanley is advising clients to publish their sustainability frameworks in advance to give bondholders more time to review the documents, which usually detail the issuer’s sustainability goals and eligible projects that may be funded using the bond proceeds, James said.
Drive-by sales, or deals that are typically announced and completed in one day, are generally less in favour these days but can still garner investor demand in certain instances, added James, who has been with Morgan Stanley for over 30 years.
“Given the continued need to decarbonise the real economy, we see sustainable finance as a good way to synchronise a company’s overall corporate objectives with its financing goals,” said James. —Bloomberg
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.
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