Climate-linked bond sales have accelerated in 2021 as socially responsible investors begin to dabble in green fixed income assets.
According to Dealogic, over $31 billion worth of bonds with borrowing costs associated with climate change have been sold over the past three months, the Wall Street Journal reports. To put this sudden surge in perspective, over $23 billion in sustainable bonds was sold between the first deal in 2019 and the start of the second quarter this year.
Carbon emitters like Enel, Repsol, and Enbridge made up the lion’s share of new issues, raising almost $7 billion from such bonds last month.
The sustainability-linked bond market is still relatively small compared to the broader green bond market where borrowers raise funds on “green” projects. Sustainability-linked bonds, on the other hand, can raise funds for any purpose, but borrowers are subject to higher interest costs if they fail to hit socially responsible goals like cutting emissions or hiring more female executives.
“Investors want the more-challenged companies to come with a properly defined decarbonization [plan] which they can invest in,” Paul O’Connor, head of ESG debt capital markets in Europe at J.P. Morgan, told the WSJ. “Investors want to be able to say: We are decarbonizing our portfolios at the right rate to hit international targets.”
Ashton Parker, a senior credit analyst at Lombard Odier Investment Managers, has shown interest in sustainability-linked bonds with carbon emission targets from higher polluting companies as a strategy for reducing their carbon footprint. Enel is one such example.
“Enel is one of the leaders in decarbonizing,” Parker told the WSJ. “It’s a company where, if they issue a target and there’s going to be a cost to missing it, you can be 90%-100% sure they’re going to hit it.”
As more investors look into the sustainability-linked bond market, issuers are coming out with a variety of different targets, step-up costs, and penalty periods for meeting or missing sustainability goals.
“With companies like Enel, which are committing to make more and more of their debt sustainability linked, then the penalties for missing targets start to become increasingly material,” Mitch Reznick, head of sustainable fixed income at Federated Hermes, told the WSJ.
For more news, information, and strategy, visit the ESG Channel.