Rising ESG Bond Quality: Analyzing Market Trends and Reducing Greenwashing
After a period of rapid growth, the issuance of ESG-labeled bonds has recently declined, despite an improvement in overall market quality (Display). This combination presents an interesting dynamic, and there’s a reason behind it.
We conducted an analysis of over 11,000 ESG-labeled bonds, evaluating the initial intentions stated at issuance against their actual performance 12 months later. This included assessing how the bond proceeds were allocated across various projects and the resulting ESG impact.
We developed a quality (or strength) score for each bond using three main criteria: disclosure, ambition and credibility versus targets. This score was calculated by considering more than 20 underlying factors, each weighted differently. This approach allowed us to compare bonds across different issuers, sectors, and issuance years.
The rise in strength scores aligns with our observations: weaker bond issuances are becoming less common, leading to an overall improvement in the quality of the new-issue market and a reduction in concerns about greenwashing. We also attribute much of this improvement to active investors who are encouraging issuers to create stronger ESG-labeled bond structures.
Our own engagements provide examples. A global utility company issued sustainability-linked bonds (SLBs) with ambitious targets but fell short. Our discussions with management revealed that the shortfall was due to temporary factors beyond their control. We appreciated their ambition and supported continued SLB issuance. Similarly, a European consumer company’s SLB aimed for significant reductions in scope 3 emissions, while many of its peers only reported on scopes 1 and 2.
We conducted an analysis of over 11,000 ESG-labeled bonds, evaluating the initial intentions stated at issuance against their actual performance 12 months later. This included assessing how the bond proceeds were allocated across various projects and the resulting ESG impact.
We developed a quality (or strength) score for each bond using three main criteria: disclosure, ambition and credibility versus targets. This score was calculated by considering more than 20 underlying factors, each weighted differently. This approach allowed us to compare bonds across different issuers, sectors, and issuance years.
The rise in strength scores aligns with our observations: weaker bond issuances are becoming less common, leading to an overall improvement in the quality of the new-issue market and a reduction in concerns about greenwashing. We also attribute much of this improvement to active investors who are encouraging issuers to create stronger ESG-labeled bond structures.
Our own engagements provide examples. A global utility company issued sustainability-linked bonds (SLBs) with ambitious targets but fell short. Our discussions with management revealed that the shortfall was due to temporary factors beyond their control. We appreciated their ambition and supported continued SLB issuance. Similarly, a European consumer company’s SLB aimed for significant reductions in scope 3 emissions, while many of its peers only reported on scopes 1 and 2.
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