Debt issuers wonder if ESG label is worth it as skepticism spreads

LONDON (BLOOMBERG) – Bond issuers appear to be reviewing the merits of tapping the ESG debt market, based on an assessment that the lower financing costs the label generally brings aren’t worth the risk of being exposed to greenwash accusations.

“There’s a number of issuers that are reconsidering the cost benefit trade-off,” Jason Taylor, the managing director for sustainability advisory and finance at National Bank of Canada, said in an interview.

“When you define a successful sustainable finance transaction, there’s a lot of dimensions by which you can analyse it,” he said.

“One is the cost savings from the greenium. But if it comes with a high level of scrutiny post transaction, it can cause some people to really second-guess whether that one or two basis points is really worth the risk of having perhaps a couple of very uncomfortable articles written.”

Sustainable debt issuance

For now, much of the regulatory crackdown on greenwashing has centred on asset managers. But the finance industry has itself repeatedly raised concerns around the risks lurking in some corners of the market for environmental, social and governance debt.

Goldman Sachs Group’s NN Investment Partners is among asset managers getting pickier and is increasingly rejecting ESG debt pitches, it said last month.

Isobel Edwards, a green bond analyst at the firm, said she and her team are often incredulous when they see some of the claims issuers make.

“We tend to call it a greenwash when it comes to the market with everything 100 per cent aligned and everything is the greenest it can possibly be, the sustainability plan is the best on the market,” she said in a July interview.

And in June, a manager at JPMorgan Chase & Co revealed his misgivings over many of the ESG loan pitches crossing his desk.

Issuers increasingly have to contend with the reputational risk of sending ESG debt to market that may not yet be fit for purpose.

Chanel – best known for its No. 5 perfume and iconic tweed suits – was recently called out for missing an interim renewable energy target for 2021 on a sustainability-linked bond.

And last year it emerged that an ESG bond issued by Tesco, the UK’s biggest grocery chain, was based on targets that covered only 2 per cent of its annual emissions.