Companies based in the US are on track to halve the amount of ESG-labeled debt they issue this year, marking a clear departure from the trend on the other side of the Atlantic, according to an analysis by Goldman Sachs Group Inc.
The divergence should be seen in light of the different regulatory environments in the two regions, with Europe creating an infrastructure that supports issuance of debt incorporating environmental, social and governance goals, said Goldman analysts including Michael Puempel and Sienna Mori.
This year is likely to see just $40 billion of ESG corporate investment-grade issuance in the US dollar market, according to the Goldman analysts. That’s half the amount issued by US companies last year, and just 40% of the level reached in 2021, they said. The slump means that ESG-related issuance only accounts for 3% of total dollar-denominated supply in the investment-grade market, Goldman estimates.
That’s “sharply down” from levels seen in previous years, when the relative share was double that, Puempel and Mori said.
The development follows more than a year of political attacks against ESG in the US, with high-profile Republicans such as Florida Governor and presidential hopeful Ron DeSantis seeking to vilify the investment strategy as “woke” and anti-American. Combined with the fallout of an energy crisis that’s driven up fuel costs and led Big Oil to walk back green transition plans, issuing green bonds in the US has become a fraught business.
Goldman notes that much of the drop-off in US ESG issuance can be traced back to a lack of supply from the utility and energy sectors, as well as the financial firms backing them.
What’s more, adding an ESG label to a bond is unlikely to improve its performance, according to the Goldman analysts. That said, there’s also no observable underperformance associated with labeling a bond ESG, they noted.
In Europe, companies’ investment-grade ESG issuance has “held up better,” the Goldman analysts said, with the overall level of supply on track to reach €140 billion ($147 billion) this year.
Globally, ESG fixed income funds have continued to attract client flows, with the 5.5% increase over the period beating the 3.6% seen among their non-ESG equivalents, Goldman said.
“In our view, these inflows are growing evidence that this investment style continues to gain traction as investors look for potential ways to play the energy transition theme as well as invest according to other potential ESG-related objectives,” Puempel and Mori said.
The Goldman analysis matches the picture painted by data from Morningstar Direct, which shows that despite the political headwinds, more ESG funds are being launched than liquidated. Globally, 90 ESG funds were closed so far this year, while 253 were opened. Even in the US, 25 more ESG funds were created than were shuttered, according to the data.
--With assistance from Frances Schwartzkopff.
