Gush of ESG bond sales expected from blue wave

The shift of U.S. government control to the Democratic Party this month could give an added jolt to sales of corporate bonds that finance environmental and socially responsible projects.

With the Democrats now gaining control of the Senate, President-elect Joe Biden’s proposed programs and initiatives to, among other things, combat climate change and invest in infrastructure are more likely to happen. Private sector investments linked to these kinds of plans could result in greater issuance of environmental, social and governance bonds, according to Stephen Liberatore, head of fixed-income ESG and impact investing strategies at Nuveen.

“Leadership that’s better-focused on environmental and social issues will help drive companies to understand what’s expected of them and how they can approach ESG,” said Liberatore. Nuveen oversees about $1.1 trillion in assets globally, including around $15 billion in ESG and impact dedicated debt strategies.

Any increase in issuance of corporate ESG securities will come in a year where regular investment-grade company bond sales are expected to decline. But overall green, social and sustainability-linked bond issuance could rise by about a third in 2021 driven in part by government sales, said Marilyn Ceci, global head of ESG debt capital markets at JPMorgan Chase & Co. in October, after already having jumped last year.

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Money managers’ demand for ESG notes is growing, as social and racial issues that were amplified during the pandemic have focused more investors on how their money might make the world better while earning a return, according to Andrew Karp, head of investment grade capital markets at Bank of America Corp. This year’s issuance will probably come from a range of industries, including health care and technology, he said.

“We know from having conversations with our clients that ESG is taking on increased prominence and companies appear to be more focused on using the markets to express their view on the importance of ESG,” Karp said.

That growing demand is already showing up in issuance data. Companies raised a record $55 billion in dollar-denominated ESG notes last year, almost double the roughly $30 billion raised in 2019, according to data compiled by Bloomberg. Bank of America was the biggest underwriter of the bonds last year, according to a ranking compiled by Bloomberg.

ESG corporate bond issuance is dominated by blue-chip utilities and banks but Karp expects more high-yield companies to tap the market as buyers seek greater returns.

The fastest-growing part of the ESG market this year will probably be sustainability-linked bonds, according to Steven Nichols, head of ESG capital markets for the Americas at Bank of America. Proceeds of these notes can be used for just about anything, but the issuer pledges to meet some sort of social or environmental target, such as cutting carbon emissions across the company by a particular amount. They can be a good option for companies that might not have specific projects to finance but still want to make their businesses more sustainable.

“This is particularly relevant for issuers in sectors where most of their environmental and/or social impact is in their supply chain, such as retail, consumer products or food and beverage,” said Nichols.

Traditional sustainability bonds, which fund specific projects, are also likely to see more issuance as well, Nichols said. Alphabet Inc., Google’s parent, sold $5.75 billion of the notes in the largest corporate bond sale dedicated to ESG purposes last year to fund Black entrepreneurs, Covid-hit businesses and green buildings among other eligible projects.

Dollar dominance

JPMorgan expects this year to be the first time more green, social, and governance debt is sold in dollars than euros. Regulation and rising demand from dedicated ESG-mandated funds are fuel for growth, the bank’s analysts wrote in a note in October.

Wall Street banks will probably continue to be big issuers of the notes, too. Last year Citigroup Inc. issued the biggest social bond from the private sector meant for affordable housing, Bank of America became the first U.S. financial institution to sell bonds with all proceeds explicitly linked to tackling the new coronavirus and JPMorgan issued green bonds for the first time.

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