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Commentary

Take Five: Green Bonds Scale New Peaks  

A selection of this week’s major stories impacting ESG investors, in five easy pieces. 

This week, green and blue debt were in focus around the world, while the US courted further climate controversy.

New peaks – Green bonds and other sustainability-related instruments demonstrated their resilience this week. An assessment of H1 2023 activity by the Climate Bonds Initiative reported that GSS+ bonds reached US$4.2 trillion in cumulative issuance, putting the market on track to reach US$5 trillion by the end of the year. Business might be slower than the recent past, in line with the wider debt markets, but there was still almost US$280 billion of green bonds issued in the first six months of 2023, well above the levels expected by some at a time when rising interest rates make conditions challenging for most issuers. European issuance dominated, with the Association for Financial Markets in Europe noting the region’s “advanced policy regulations” as a factor motivating issuers to price “transparent and ambitious deals”, even ahead of the EU Green Bond Standard being adopted this autumn. According to Bloomberg, bond launches supporting low-carbon energy exceeded debt issuance by fossil fuel companies in H1 2023. Labelled bonds continue to face growing pains, especially the sustainability-linked market, which is taking longer to recover and achieving mixed results, but is “evolving and improving” in terms of alignment. There’s still a mountain to be climbed, however. “We need to see US$5 trillion of sustainable finance being raised annually in the latter half of the decade, to prevent future climate collapse,” said Sean Kidney, CBI’s CEO.   

Into the blue – The closing of Africa’s first debt-for-nature swap was welcomed by many as an example of public and private sector investors collaborating on a blended finance structure to nature-positive effect. But Gabon’s US$436 million deal wasn’t universally praised. The government of the small west African nation switched existing debt for a US$500 million ‘blue bond’ with a lower rate and a longer maturity, with the intention of generating US$163 million for marine conservation; the US Development Finance Corporation provided the risk insurance that secured its Aa2 credit rating. Debt-for-nature swaps have great potential in funding climate and nature action in developing countries, by restructuring outstanding borrowings to allow debt service payments to fund environmental initiatives. A big step forward was an Ecuadorian deal in May, which swapped US$1.6 billion of debt for a US$656 million loan, also to fund marine conservation. But these deals are not without their problems, due partly to a lack of transparency over the projects eligible for funding, which can make it hard to evaluate impact or integrity. While this was a concern for some over the Gabon deal, others noted the high transaction costs and potentially negative cashflow savings, causing one to call it a “standard liability management transaction”.   

More than Montana – As if the US needed any more courtroom drama or ESG-related controversy, a judge in Montana ruled this week in favour of a case brought against the state for violating the right of young people to a “clean and healthful” environment. Specifically, the judge agreed that the Montana Environmental Policy Act was unconstitutional as it prevented climate impacts from being considered when assessing fossil fuel permits. The local impacts are unclear, as the state will appeal, and its Republican-led legislature are responsible for deciding how to bring the policy into compliance. But the ripples could reach further shores by further endorsing the principle that governments must factor climate considerations into every policy decision. Not only does it echo an Australian ruling from 2021 which ruled that governments have a duty of care to protect young people from the impacts of climate change. It is part of growing trend in climate change litigation with almost 200 being filed in the last 12 months.  

Different paths; same goal – This week marked the first anniversary of the passing of the Inflation Reduction Act, the landmark achievement of the Biden Presidency, which aimed to pivot the US economy toward a vibrant green future through investment incentives. US sustainable investment non-profit Ceres remarked on its rapid economic impact, pointing to the creation of 170,000 green jobs already. The act also kickstarted an era of green investment competition. Most notably, Europe responded with the Net Zero Industry Act, designed to stimulate inflows into low-carbon sectors, having previously centred its green revolution on less direct, arguably more bureaucratic initiatives, such as its green taxonomy. The NZIA has had a less catalytic impact than the IRA to date, but that could change with the passing into law this week of the supporting Critical Raw Minerals Act. Recognising the importance of minerals to the renewable energy transition, the act is expected to stimulate extraction, processing and recycling inside the EU and beyond, but – given it does not provide the tax incentives offered by the US IRA – it remains to be seen how well it can deliver on its ambitions.  

Gensler’s gambit – Some asset managers might have been looking over their shoulders this week, following reports of impending enforcement action by the Securities and Exchange Commission against firms making overstated claims about their ESG funds. It’s been some time since the SEC took action on greenwashing, while progress has been made in parallel on new fund labelling rules, as in other major jurisdictions. But the timing of this expected swoop is interesting, pre-empting as it may the expected October release of the SEC’s climate risk disclosure rule. Could it be that Chair Gary Gensler is looking to distract the anti-ESG lobby by feeling some less-than-green collars?  

 

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