Goldman Sachs predicts halving of ESG bond issuance in US

The slump reflects the different regulatory set-up to Europe where market for ESG debt is still strong

The Manhattan skyline. The ESG slump in the US follows more than a year of political attacks against the investment strategy. Reuters

Companies based in the US are on track to halve the amount of ESG-labelled debt they issue this year, marking a clear departure from the trend on the other side of the Atlantic, according to an analysis by Goldman Sachs Group.

The US slump reflects the different regulatory set-ups in the two regions, with Europe more supportive of debt that incorporates environmental, social and governance goals, said Goldman analysts including Michael Puempel and Sienna Mori.

The development follows more than a year of political attacks against ESG in the US, with high-profile Republicans such as Florida governor and presidential hopeful Ron DeSantis seeking to vilify the investment strategy as “woke” and anti-American.

Combined with the fallout of an energy crisis that’s driven up fuel costs and led big oil to walk back green transition plans, issuing green bonds in the US has become a fraught business.

Meanwhile bonds of all stripes – whether they have got an ESG label or not – are feeling the fallout of continually rising interest rates. This week, the US 30-year Treasury yield rose above 5 per cent for the first time since 2007, sending reverberations across equity and debt markets.

This year is likely to see just $40 billion of ESG corporate investment-grade issuance in the US dollar market, according to the Goldman analysts. That’s half the amount issued by US companies last year, and just 40 per cent of the level reached in 2021, they said.

The slump means that ESG-related issuance only accounts for 3 per cent of total dollar-denominated supply in the investment-grade market, Goldman estimated.

That’s “sharply down” from levels seen in previous years, when the relative share was double that, the analysts said.

Goldman notes that much of the drop-off in US ESG issuance can be traced back to a lack of supply from the utility and energy sectors, as well as the financial firms backing them.

What’s more, adding an ESG label to a bond is unlikely to improve its performance, according to the Goldman analysts. That said, there’s also no observable underperformance associated with labelling a bond ESG, they noted.

The findings fit broadly with an analysis by the European Securities and Markets Authority published on Friday, with ESMA noting that it “cannot confirm a systematic pricing benefit for any ESG-labelled debt type as of March 2023. However, issuers of ESG bonds did benefit from a statistically significant pricing in the past driven by their issuer-level ESG credentials”.

In Europe, companies’ investment-grade ESG issuance has “held up better”, the Goldman analysts said, with the overall level of supply on track to reach €140 billion ($147 billion) this year.

Globally, ESG fixed income funds have continued to attract client flows, with the 5.5 per cent increase over the period beating the 3.6 per cent seen among their non-ESG equivalents, Goldman said.

“In our view, these inflows are growing evidence that this investment style continues to gain traction as investors look for potential ways to play the energy transition theme as well as invest according to other potential ESG-related objectives,” analysts said.

The Goldman analysis matches the picture painted by data from Morningstar Direct, which shows that despite the political headwinds, more ESG funds are being launched than liquidated.

Globally, 90 ESG funds were closed so far this year, while 253 were opened. Even in the US, 25 more ESG funds were created than were shuttered, according to the data.