Rapid ESG Growth Holds Some Calls for Caution | ETF Trends

As environmental, social and governance or ESG investments gain momentum, some are concerned that the rapid pace may be fueling a bubble instead of sustainable growth.

Total green bond issuance crossed $1 trillion in the past week, matching ESG-focused funds that have a similar amount in assets under management, Bloomberg reports. In just the past month, more than $50 billion of green bonds were sold.

However, this rapid growth spurt has some warning that investors may be just chasing after the next bubble.

“ESG is nothing but a passing investment fad, not unlike smart beta, the BRICs, structured products or any of the myriad market bubbles over the last 25 years, small and large,” Jared Dillian, an investment strategist at Mauldin Economics, said on Bloomberg.

On the other hand, more bullish observers like Bank of America project another $450 billion of green, social and sustainable debt to be issued in 2021, or about the same amount issued so far in 2020, with sales of green bonds, or those marked for environmental projects, will account for “the bulk” of the transactions.

Critics have pointed to data that showed these green initiatives are not really that green. For example, the Bank for International Settlements, or so-called central bank for central banks, said last month that it saw little proof that green bonds resulted in lower corporate carbon emissions. The median change in carbon intensity or the ratio of carbon emissions to revenue of green bond issuers has shown minimal change.

Josh Olazabal, head of ESG and Sustainability at CreditSights Inc, also warned that investors are becoming increasingly concerned about how funds from green bond sales are used, highlighting the potential for “greenwashing” investments.

“It’s definitely something that a lot of investors are talking about, and they’re seeking more specific details from companies and better assurances from third-party sources,” Olazabal told Bloomberg. “Especially as green bond issuance expands to non-traditional issuers in more diverse sectors, they want to know where the proceeds are going and how green they are.”

Consequently, there has been a push to standardize a set of rules for “green” projects and investments.

“The integration of environmental, social and governance criteria has never been more important for investors than in 2020,” Maia Godemer, a sustainable finance associate at BNEF, which tracks green bond issuance, told Bloomberg. “It is not only likely that these varieties of financing will grow in volumes in coming years, but we will see further innovation.”