A wind of rigor is blowing through the market for ESG labels and other ESG related bonds. An analysis of new ESG issues in 2024 illustrates the trend: while volumes are up by 2.5% compared with the same period in 2023, 61% of these new issues are "classic" green bonds. Other bonds with similar formats that allow investors to know which projects their funds will be allocated to are also on the increase. By contrast, sustainability-linked bonds (SLBs), where the issuer sets itself global objectives, are in free fall, with 58% fewer volumes. The trend is the same for sustainability-linked loans (SLL), with volumes down 74%.
New regulatory constraints, fewer financial incentives and the risk of being accused of "greenwashing" are holding investors back.
Some are worried about the new rules to be introduced by the FCA, the UK regulator, on 31 May. Although it is not the first to introduce safeguards, it is taking the pressure up a notch. The rules could affect not only borrowers but also the banks that structure the bonds and other loans, a form of shared responsibility to limit the risks of greenwashing.
The rules would also cover communication, documentation and even the use of images. It will no longer be possible to use "a picture of a smiling orang-utan against a lush jungle backdrop" to promote a company producing palm oil.
The British regulator is not the only one to be "up in arms". The scandal affecting the SBTi reference label, following a haphazard change in methodology, and the mobilisation of NGOs against
TotalEnergies are other examples. The French giant had announced in 2021 that it would only finance itself with sustainability-linked bonds (SLBs). Three years later, no TotalEnergies SLB has been issued, but in April the group issued a conventional bond of $4.5 billion spread over three maturities: 10, 30 and 40 years.
Some sixty NGOs called on investors not to subscribe because, among other things, it is "the listed company in the world with the most short-term oil and gas expansion plans". The call did not have a huge impact, and with order books of more than $14 billion, Total was able to tighten the initial terms of its new bonds by 20 basis points. In other words, the group 'saved' $230 million on interest charges. Label or no label, in the end that is the question.
The conclusions of a Bloomberg analysis of the financing of companies active in renewable energies are interesting: 70% of the bonds issued are in "conventional" format, and for the rest, the label mainly used is "green bonds".
With the emergence of "green capex" and the ambitions, voluntary or regulatory, of all companies not active in renewable energy, financing tools are needed. And with more than a decade of existence and increased transparency, green bonds should confirm their leading role in this area.
