Industry Voice: Evaluating ESG Bonds—What's Behind the Label?

Greenwashing risks underpin importance of assessing an ESG bond’s credentials

clock • 3 min read
Industry Voice: Evaluating ESG Bonds—What's Behind the Label?

The market for debt issued with an environmental, social, and governance (ESG) focus has grown rapidly in recent years to become a significant feature of today's fixed income investing landscape. While we are encouraged to see companies and governments undertaking green and social projects eligible for ESG‑labelled bond financing, caution is warranted. This fast‑growing, yet still nascent, category has proven vulnerable to greenwashing—where some securities convey a false impression or provide misleading information about the environmental credentials of an organisation's products, services, and investments. Furthermore, not all green, social, sustainability, and sustainability‑linked bonds are created equal or have adequate safeguards in place to ensure that their proceeds will indeed target sustainable activities. For these reasons, we do not feel that it is appropriate to just accept a bond as "sustainable" based solely on its label. A robust ESG bond framework is vital, therefore, to help evaluate the credentials of an ESG‑labelled bond.

Rapid Growth in ESG‑Labelled Issuance Set to Continue 

Since the issuance of the first green bond in 2007, the market for sustainable finance has grown considerably and broadened to include social, sustainability, and sustainability‑linked bonds. In 2021, for the first time ever, more than USD 1 trillion worth of bonds were sold for the purpose of either financing specific environmental/social projects (green, social, and sustainability bonds) or for general purposes (sustainability‑linked bonds) where the structure is linked to the issuer's achievement of a predefined ESG target. 

 

This post was funded by T. Rowe Price

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