‘S’ in ESG Debt Proves Too Complex for Issuers Seeking Easy Wins

A pandemic-era boom in debt backing social causes is already fading as other types of bonds jostle for supremacy in a fast-moving ethical market.

Governments that had propped up Covid-ravaged economies by issuing social bonds are now turning their attention to longer-term climate goals, while companies are keen for increased flexibility when spending proceeds from sales of environmental, social and governance (ESG) debt. That’s crimping the flow of social notes that typically fund specific projects such as job creation or affordable housing.

Sales of social bonds in Europe have plunged 60% so far this year to 10.9 billion euros ($12.3 billion) and it’s a similar picture in the U.S., according to data compiled by Bloomberg. By contrast, issuance of sustainability and sustainability-linked debt is booming, with volumes more than doubling to 16 billion euros from the same period a year ago.

It’s a global phenomenon that’s expected to continue. Moody’s ESG Solutions expects worldwide sales of social bonds to fall 25% this year to around $150 billion, even as it sees green bonds driving a record $1.35 trillion in overall ethical issuance.

“We are seeing a return of focus to green because some Covid-related spending has declined,” said Anne van Riel, the head of sustainable finance capital markets for the Americas at BNP Paribas SA, this year’s top underwriter of green bonds. “This year we expect companies, which have issued fewer social bonds, to incorporate social elements in sustainability bond issuance.”