Issuance of bonds meant to benefit the environment will likely remain muted in the US because companies are no longer getting a material price advantage for selling such debt, according to T. Rowe Price's Matt Lawton.
The so-called greenium, which measures the spread of green bonds to non-green bonds from the same issuer, is now ranging between zero to 1 basis point on average for corporations, which isn't "economically appealing for an issuer," he said. Sovereigns are getting about 7 basis points on average, he added.
"I've spoken with treasurers where they're absolutely looking at the greenium," he said. "For some treasurers, in my experience, if they don't see a material economic incentive on the other side, that's a headwind."
Republican-led backlash against do-good investing — particularly with Donald Trump's election victory — will also potentially keep first-time borrowers at bay, according to Lawton.
Trump has said that he intends to ramp up fossil-fuel production and undo Biden-era green policies like the Inflation Reduction Act, which was widely expected to boost issuance of ESG-linked bonds in the US.
That's a challenging setup for issuance of the bonds in the US, said Lawton, a portfolio manager for T. Rowe's global impact credit strategy. "It's a headwind in terms of new sectors and new issuers coming to market."
Corporate issuance of ESG-linked bonds this year through Dec. 6 — at $27.2 billion — is already the least since 2019, according to data compiled by Bloomberg.
The IRA was expected to mobilize private capital into sustainable solutions. If it's softened under Trump, that will probably lead to less capital investment into sustainable initiatives and bond financing in the short term.
Lawton expects less enthusiasm from would-be first-time issuers, who incur costs to develop a bond framework outlining how the proceeds will be used, get external verification and face the additional burden of annually reporting to investors on the use of proceeds.
He spoke with Bloomberg News in a series of interviews ending Dec. 9. Below are highlights of the conversation, condensed and edited for clarity. T. Rowe had $1.61 trillion of assets under management as of end of October.
It's been a really busy year for all kinds of bond issuance, not just ESG-linked. What's been the biggest takeaway for you?
What's been the biggest takeaway for me is just the tension between yields and spreads in the market, and how that tension is playing out in issuance and in demand. Obviously we've been in a prolonged period where spread valuations have been very tight, but yields relative to history have been very attractive. And so I have been somewhat surprised by the very strong demand that has been supporting the credit markets. It's very conditional upon the macroeconomic backdrop.
Just given where spread valuations are, we're priced for perfection from a macroeconomic perspective. A slight wobble from the macroeconomic perspective is a vulnerability to spreads. There's very little cushion at the moment. Risks are probably skewed to spreads being wider than where we are now.
If the demand for green bonds is so strong, why has the greenium diminished over the years?
I can't quite explain why that that's the case. The demand for these bonds is not waning. The number of mandates and opportunities with more intensive applications of impact and sustainability coming through in the fixed income side is increasing, which would suggest that the future demand picture is constructive.
We are seeing more blue bond issuance to fund projects aimed at improving water resources and marine life. What's all that about?
For all of the rhetoric around ESG backlash, nobody's against having clean water and clean ocean. It's one of those unifying sustainability themes that seems to connect across on a global basis.
We see it hitting upwards of a hundred billion dollars by 2030, in terms of cumulative issuance. The blue economy is the seventh largest economy in the world and there's a ton of investment that is needed to decarbonize things like the shipping industry, offshore renewables and water infrastructure. There is a large untapped funding potential that we think is actually starting to be brought out right now.
Are you still concerned about corporations greenwashing?
That's an evergreen concern always. Certainly standards have improved and consolidated as the market has a better understanding of what sort of qualifies as a credible green bond. But that said, I still think you have to be very careful and alive to the risk of greenwashing.
