A ‘pause for thought’ in sustainable debt

Hello. It’s not a pretty picture for the environmental, social and governance space in the US. At least that’s according to the latest figures on sustainable bond issuances and flows into funds that promise to invest in a cleaner world economy. These show the transatlantic divide in attitudes to green finance shows no signs of going away.

Also today, as tourists take to the air once more there is something the aviation industry has decided to leave behind: carbon credits. What was once a marker of corporate responsibility has become a potential liability, because of concerns about greenwashing. — Kenza Bryan

US companies cool on ‘sustainable’ debt

ESG has become a contentious acronym in the US, where Republican politicians have been railing against “woke capitalism” and attempts to squeeze funding for oil and gas.

The controversy may be weighing on the minds of chief financial officers, judging by a sharp pullback in corporate issuance of bonds tied to sustainability promises.

The non-profit Climate Bonds Initiative has tracked issuance of bonds that raise money for specific finance, environmental and social projects — as well as bonds that have repayment rates tied to hitting targets such as cutting carbon emissions.

It found that issuances of all these types of bonds in the US fell 39 per cent in the first half of the year compared with the same period in 2022, dropping from $65bn to $39.8bn.

This was a much sharper drop than the 15 per cent decline in sustainable bond volumes globally in the first six months of the year, and Dealogic’s estimate of a 10 per cent fall in all types of bond issuances, driven by high interest rates that pushed up the cost to issuers. In Europe, the value of issuances rose 3 per cent from $224.4bn to $231.5bn.

The CBI said “anti-ESG political rhetoric” in the US might have been a contributing factor to the decline in that region.

The US political climate might also be behind a national dent in the appetite for sustainable investment funds. Funds marketed as sustainable based in the US saw outflows of $635mn between April to June, compared with inflows of $20bn for those based in Europe, according to Morningstar data.

Some observers are sceptical that fluctuations in the green debt market affect either the planet or the companies investing in the energy transition, citing an unclear relationship between green finance and lower costs for sustainable projects.

Sustainable bonds were mostly used as “communication” and “green signalling” tools to demonstrate an issuer’s sustainable credentials, Mickaël Mangot, chief scientific officer at think-tank 2 Degrees Investing Initiative, told Moral Money.

It is therefore not surprising that volumes vary “depending on the political context and the expected consequences for [issuers’] reputation or licence to operate”, Mangot argued. (Kenza Bryan)

Carbon offset market tails off

Moves by Delta Air Lines, easyJet and other high-carbon-emitting companies to cut purchases of carbon credits have helped to push down prices and raise questions about the market’s role in corporate climate change policies.

The market works by allowing companies to compensate for the release of emissions by financing a separate saving of carbon dioxide from the atmosphere, for example, by storing CO₂ underground or planting trees.

The latest estimates place the value of voluntary carbon credits in circulation at roughly $2bn. But in the first half of this year the market has been hit by claims that companies using carbon credits are dodging their climate responsibilities — buying offsets for the carbon dioxide they emit instead of fixing the underlying business.

“Five years ago investors were keen for corporates to buy high-quality credits and now, in very binary terms, participation in the market is seen as a negative,” said Luke Sussams, a regional head of ESG and sustainable finance strategy at Jefferies investment bank.

Some of the biggest buyers of carbon credits including Delta Air Lines, JetBlue and easyJet, as well as Swiss food giant Nestlé and French luxury group Kering, have all in recent months said they would halt or slow down their use of carbon credits, after the methodology underpinning this market was hit by controversy.

Delta Air Lines, which reported the highest earnings in its history last month, accounted for more than a tenth of all carbon credits used between 2020 and 2022, according to the consultancy Trove Research. Delta has used these purchases to describe itself as “the world’s first carbon-neutral airline”.

But use of this label was challenged in a class-action complaint filed in California in May. The lawsuit referenced an investigation by The Guardian and others alleging that more than 90 per cent of offsets linked to the conservation of rainforests overstated the amount of carbon saved. Verra, the largest accreditation body for voluntary credits, has strongly disputed these claims. Delta did not respond to a request for comment.

The number of credits taken out of the carbon market by companies using them to offset their emissions fell to 85mn in the first half of 2023, a 9 per cent drop on the 93mn “retired” in the first half of 2022, according to Trove.

This pushed up excess supply of carbon credits to nearly five times annual demand as of the end of June. Voluntary credit prices stood at an average of $8.20 per tonne of carbon at the end of June, a 10.9 per cent drop on last August.

In theory, lower prices should encourage carbon-emitting companies to buy more offsets. However, the controversy surrounding the effectiveness of offsets has led companies to reduce purchases out of concern of being accused of greenwashing.

Guy Turner, Trove’s founder, said companies had “paused for thought, for good reason”. He hoped this would lead to more scrutiny of emissions, and incentivise airlines to invest in sustainable aviation fuels to cut, rather than offset emissions.

But in practice, some companies that stepped back from carbon markets may “do absolutely nothing and be silent and hope it goes away”, he said.

Some environmental organisations have tried to increase confidence in carbon markets. The Voluntary Carbon Markets Integrity Initiative published rules in June suggesting companies should use offsets only once they have cut emissions. Verra is due to amend its rules later this year. (Kenza Bryan)

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