ESG-Linked Bond Sales Drop Most on Record
Meanwhile, green bonds, whose proceeds can be used only for specific projects, had their second-busiest year ever.
Global sales of sustainability-linked bonds (SLBs) plunged 22 percent in 2023—a record drop—as investors remain critical of the label, and more issuers risk missing their pre-determined environmental, social, or corporate governance (ESG) targets.
Issuance of SLBs fell to $67.8 billion last year, the biggest full-year drop since Italian utility Enel SpA issued the first such bond in 2019, according to data compiled by Bloomberg. Sales of SLBs also declined in 2022, after soaring almost tenfold from 2020 to 2021.
Investors have been skeptical of SLBs in recent years, with asset managers including T. Rowe Price Group Inc. and Nuveen criticizing companies for issuing bonds with weak and flexible targets. Setting performance targets is challenging for many issuers, Sustainable Fitch’s Nneka Chike-Obi, wrote in a November note. The risk of borrowers potentially overstating the benefits of these bonds, or “greenwashing,” also remains high for SLBs compared with other types of ESG bonds, according to the Fitch Group entity.
“A challenge for investors when evaluating SLBs is that material KPIs [key performance indicators] can be undermined by poorly calibrated sustainability-performance targets,” wrote Chike-Obi. These bonds tie interest payments to such indicators and would typically have to pay a higher interest rate if they miss their targets.
Borrowers are “off track” for 43 percent of the KPIs they agreed to target, according to a BloombergNEF report published in November. In a separate report in September, analysts at Stockholm-based SEB AB estimated that about a third of European SLBs are likely to miss their targets.
To add to investors’ wariness, regulators and industry bodies have been raising more concerns about greenwashing in the SLB structure.
Meanwhile, sales of green bonds—the largest sustainable debt category by volume, whose proceeds can be used only for specific projects, unlike SLBs—totaled $528.4 billion in 2023. This marked the category’s second busiest year after a record $530.2 billion was issued in 2021. BNP Paribas is forecasting $600 billion in global green-bond issuance this year.
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ISSUANCE
| November | December | 2023 | Year-over-Year | ||
| Green Bonds | $57.4 billion | $13.6 billion | $528.39 billion | +9.7% | |
| Green Bond Principles | $57.08 billion | $13.49 billion | $527.01 billion | +9.7% | |
| ESG Muni | $7.31 billion | $4.01 billion | $56.57 billion | +23.2% | |
| Sustainability Bonds | $11.43 billion | $3.24 billion | $160.6 billion | +1.8% | |
| Social Bonds | $9.87 billion | $2.7 billion | $139.9 billion | -0.3% | |
| Sustainability-linked Bonds | $5.03 billion | $1.49 billion | $67.75 billion | -22.4% | |
| Sustainability-linked Loans | $17.61 billion | $29.67 billion | $284.39 billion | -41.0% | |
| Green Loans | $7.66 billion | $7.74 billion | $95.99 billion | -23.1% | |
| *including preliminary securities | |||||
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