Last year, emerging economies sold ESG bonds at more than twice the rate of developed economies. The growth rate of ESG bonds sales peaked at 97% in developed markets in 2021, compared to 227% across developing economies.
Total ESG issuance in emerging markets reached $230 billion, up from approximately $75 billion in 2020. Analysts predict that ESG bonds sale will continue to boom and reach $1.8 trillion this year.
The Institute of International Finance further expects emerging economies to sell about $40 billion in ESG Eurobonds in 2020, a quarter of such projected issuance.
Demand for ESG debt of all stripes remains strong for now, and that trend looks set to continue in the upcoming years thanks to profound regulatory and industry changes introduced recently. Furthermore, ESG-linked deals that impose an interest-rate penalty on borrowers that fail to hit specific sustainability goals are also growing.
While the growth rate of ESG debt sales in emerging markets is pumped up due to a lower starting point, it’s also a sign that the world is getting in on the ESG trend. China led the new deal boom, followed by Latin American and South Asian nations.
ESG investing, however, is not straightforward. About 92% of the sovereign bonds in JPMorgan Chase benchmark emerging-market bond indexes have some climate target in place, while only about 22% report each year on their progress.
Many skeptics also see a growing potential for the vague ESG goals to raise cheap money. Thus, no guaranteed cash raised in such debt deals will be used with ESG considerations in mind.
Sovereign debt investing based on ESG metrics was the ticket to outperformance last year, with nations showing high scores were topping over lower-ranking ones. Analysts believe that this trend mirrors the outperformance of investment-grade credits versus high-yield issuers.
However, the dramatic increase might also cause multiple issues, such as greenwashing. The application of misleading labels could facilitate a distorted image of ESG investing, which could specifically hurt the sector across emerging economies where disclosure requirements are usually lower than in developed nations.
Luckily, last year there were some improvements in standards introduced by U.S. and EU regulators, which have started to scrutinize the investment industry for signs of misleading claims or “greenwashing.” Additionally, some financial managers started blacklisting green bonds which have loopholes for borrowers or are issued by companies with dubious ESG track records.
