With more attention on socially responsible companies and investment strategies that reward these types of behaviors, ESG-themed bonds could be the next frontier for the fixed-income asset class.
“2021 will be the year of sustainability-linked bonds,” Marilyn Ceci, global head of ESG debt capital markets at JPMorgan, told Bloomberg. “It’s going to be the fastest-growing sustainable instrument that we have if we extrapolate what we’ve seen already.”
JPMorgan Chase & Co. projected that global sales of the bonds could range between $120 billion and $150 billion by the end of the year due to increasing investment demand. To put this in perspective, there was only $8.9 billion of ESG debt-related issuance in 2020, excluding local currency debt, according to Bloomberg data.
The results so far have been promising. About $4 billion of sustainability-linked bond issuance has already come out so far this year, or close to what was sold for all of 2019 when the securities were first introduced. JPMorgan is also in a position to track this growth story, as the bank is the biggest underwriter for these bonds.
Looking ahead, Ceci projects the sustainable finance market to expand by 49% by the end of 2021, an upwardly revised estimate from about 30% made back in October.
Borrowers are also increasingly look at sustainability-linked bonds to meet rising regulatory scrutiny. For instance, SLBs are gaining popularity among issuers following the Paris Agreement on climate change.
Furthermore, the SLBs come with greater flexibility in how they use the proceeds. The bonds can be used to fund anything, but the borrower would still have to hit a social or environmental target, like reducing carbon emissions by a specific amount.
Ceci also believes that green bonds, the largest category of sustainable debt by dollar volume, will also grow, but at a slower pace, partially due to competing structures like SLBs.
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