The ESG-labeled bond market hasn’t seen much growth over the past two years with issuance rates falling after 2021 and remaining roughly stagnant through 2023. However, AllianceBernstein indicates that the strength of ESG-labeled bonds has risen substantially over the same time frame. AllianceBernstein discusses the trend in a recent article stating:
“Using three criteria—disclosure, plus ambition of and credibility versus targets—and employing more than 20 underlying factors with different weightings, we calculated a quality (or strength) score for each bond, enabling us to compare them across issuers, universes and vintage years.
The surge in strength scores aligns with our experience: weaker issues are coming to market less frequently, so the overall quality of the new-issue market is rising and greenwashing seems less of an issue. We also believe that much of the improved strength is a result of diligent active investors guiding issuers to develop stronger ESG-labeled bond structures.”
Overall this trend is encouraging and a potential model for sustainable finance and ESG more broadly. Low-quality ESG products exiting the market is a sign that the market is maturing. ESG generated a lot of excitement, especially when ESG practices were new. While the hype may be dying down, the real work is ongoing. This is true of more than just ESG-labeled bonds. New labeling regulations and litigation are reigning in greenwashing globally for both consumer products and sustainable finance. We also recently blogged about companies reassessing climate goals with a more realistic focus. Quality is almost always more important than quantity and that holds true in ESG. The numbers may indicate that excitement for ESG has died down but put into a broader context they show that ESG is becoming more serious and results-focused. This is exactly what sustainability needs to become an integrated part of business, rather than a passing fad.
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