Bankers Doing Bond Deals Jolted by New Era of Issuer Clauses

Message to bond underwriters: Some big customers are sizing up your ESG credentials.

While vocal opposition to environmental, social and governance principles in the US has dominated headlines of late, behind the scenes, some of the world’s biggest bond issuers are quietly telling global banks that bad ESG scores may dent their appeal as underwriters.

Ulf Erlandsson, founder and chief executive of the Anthropocene Fixed Income Institute, says he’s aware of “a number of issuers” that have been close to putting their bank counterparties “in the box” — industry-speak for halting business with them for a period of time — if a bank is “fundamentally misaligned” with an issuer’s own ESG goals.

“Counterparty de-selection can be a very potent instrument, and one bankers should fear,” Erlandsson said. “Fees are the purest form of profit for bankers, and they really dislike losing them, so even just the threat of being benched is enough to set off alarm bells at senior levels.”

Take KfW, the German development bank whose 2024 funding plans have been set at roughly $100 billion. Ranking among the world’s biggest debt issuers, KfW last year raised questions about a low ESG score at Barclays Plc, according to people familiar with the matter.

The UK bank was told it had the worst rating by some margin among KfW’s top bond dealers, a message that Barclays took as an indication it might lose business, the people said, asking not to be identified discussing private deliberations.

A spokesperson for KfW, short for Kreditanstalt für Wiederaufbau, said the company has regular exchanges with its dealer banks about issues including “potential measures to improve ESG ratings.” When KfW selects banks for its green bonds, ESG ratings are among several criteria that the issuer takes into account, the spokesperson said, adding that KfW didn’t talk to Barclays about ceasing its cooperation with the bank. Last year, Barclays was a lead manager on a €3 billion ($3.2 billion) green bond issued by KfW.