The US backlash against investment strategies that incorporate environmental, social and governance issues is forcing borrowers to be more thorough when labeling bonds, a positive development for the $6 trillion ethical debt market, according to Morgan Stanley.
“To some extent some US issuers are more trepidatious because of the pushback,” said Melissa James, vice chairman of global capital markets at the New York-based lender. “Had things gone unfettered, it would’ve gotten a little too frothy. The market is maturing.”
“The greenium is pretty modest but we’re still seeing very strong interest in ESG labeled debt that’s well structured,” James said.Morgan Stanley has been involved in about 3.4% of the $531.7 billion in sustainable bonds issued by corporations and governments so far this year, making it the seventh-biggest underwriter of the debt, according to data compiled by Bloomberg. The lender has a “decent pipeline” of potential first-time issuers looking to bring new deals, said James.
Issuance of sustainability-linked bonds — a type of instrument that’s been heavily criticized by investors — is also rebounding. SLBs tie interest payments to a company’s environmental or social goals. Proceeds from those transactions can be used to fund just about anything as long as issuers pledge to meet certain ESG targets known as key performance indicators, or KPIs.
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