Globally, more than $40.5tn is now estimated to be invested using “environmental, social, and governance” (ESG) analyses.
And the past five years have seen an unprecedented increase in investors’ ESG awareness.
Record demand for sustainable finance is now spurring a rainbow of debt types by governments and companies, to fund increasingly specific ways of mitigating climate change.
While green bonds – which pledge their proceeds to finance wind farms or solar parks – are the dominant debt meme, some of these labels have so far remained relatively niche.
That’s set to change as a market now worth over $2tn develops rapidly with financial engineers creating new ways to brand such debt.
It’s only five years since the world’s first green sovereign debt was issued by coal-reliant Poland, to help transition to a lower-carbon economy.
Now the emerging spin-offs include blue bonds to fund marine and water projects; brown or transition bonds for industries too dirty to do green; nature bonds for biodiversity and carbon neutral to achieve net-zero emissions.
There’s also social bonds to help society and sustainability-linked bonds (SLBs) to set organisation-wide targets.
Chinese banks issued their first blue and carbon-neutral bonds in recent months. Junk-rated companies in Latin America are joining a European boom in SLBs so they can lower the borrowing costs, as well as boost their image.
The European Union has already broken demand records with its social bonds.
Government stimulus to recover from the pandemic, together with a raft of net-zero ambitions, could “turbo-charge this trend and contribute to a sharp rise in sustainability-linked loans and thematic bonds in 2021 and 2022,” says Gabriel Wilson-Otto, global head of sustainability research at BNP Paribas Asset Management.
Along with the increasing fragmentation, there are also calls for comprehensive rules and global standards.
Even in Europe, where sustainable bonds make up more than 20% of this year’s sales, there are no set definitions on what constitutes a green project.
Positively, policymakers are rising to the challenge.
The US government is seen planning a US green finance framework that should start to take shape by June.
The US and Europe could have an identical set of rules that determine what counts as green investment, according to French Finance Minister Bruno Le Maire.
China is also working with its European counterparts to announce a common green taxonomy this year, to define and classify green projects. That’ll be in focus at the Group of 20 meetings in Rome in October.
Make no mistake, investor demand for ESG products is surging.
Governments, corporations, and other groups raised a record $490bn last year selling green, social, and sustainability bonds. A further $347bn poured into ESG-focused investment funds: An all-time high.
Moody’s Investors Service expects sustainable-debt issuance to reach $650bn this year, while money flows to ESG funds show no signs of slowing.
BlackRock, has put its $8.7tn heft behind a powerful message: The decades ahead will be defined by minimising emissions, requiring an overhaul to everyone’s business models.
There’s no shortage of demand for more sustainable debt investments.
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