Bloomberg Law
Jan. 26, 2023, 4:12 PM

ANALYSIS: US Lead in ESG Bonds Wavers Amid Regulatory Unknowns

Abigail Gampher
Abigail Gampher
Legal Analyst

The US has been the top country for issuing ESG debt since 2012, but in the wake of SEC regulatory uncertainty, the US may lose its position as the leader.

While a post-pandemic return to “normal” might be to blame for some of this decline, a look at other countries’ bond issuance behaviors hints that other factors—significantly the SEC’s lingering threat to require greater transparency in the field of ESG—are likely at play.

Domestic ESG Bond Issuances Falter in 2022

To determine whether these two developments—the uncertainty of pending SEC regulation and the downturn in debt issuances—were linked, I took a look at the activity of the three main ESG bond types (green, social, and sustainability) in the US, and how the US compared to other top global players.

In 2022, the US issuances for these bonds—a common form of ESG debt—decreased by a staggering $28.6 billion from 2021’s $74.6 billion, with the final total coming in at about $46.0 billion.

While the issuance of both green bonds (used to support projects that are meant to have positive environmental effects, such as renewable energy) and sustainability bonds (used to support new or existing projects that combine the environmental and social purpose) saw an uptick in 2021 before falling again in 2022, the issuance of social bonds (used to support projects that are meant to have a positive social purpose, such as sustainable food systems) didn’t similarly return to roughly pre-pandemic levels.

The decline in social bonds is likely linked to efforts to alleviate the significant challenges brought on by the Covid-19 pandemic. In 2020, there was a great need for social bonds, which were used for projects supporting housing and health care access, and their overall numbers surged. But US issuances of social bonds have been in steady decline since then, whereas green and sustainability bond issuances are just above 2020 levels.

To determine whether the 2022 setback is attributable to US regulatory uncertainty, I looked to the top EU countries—which are on the whole slightly ahead of the US in terms of ESG regulation—issuing ESG debt to see if they encountered similar setbacks in 2022.

ESG Bonds See Some Expansion in 2022

France, Germany, the Netherlands, and the US are the top global performers across all ESG debt types. But last year, the US was the only one of these countries that didn’t increase the issuance of at least one ESG bond type.

Notably, none of the countries in this survey increased the issuance of all three types of bonds in 2022, which would indicate that the ESG debt market is settling post-pandemic. However, the Netherlands, Germany, and France all saw ESG regulatory developments, resulting in a level of regulatory certainty that’s missing in the US.

Netherlands’ Bond Issuances

The Netherlands issued $46.2 billion in ESG bonds last year, up from $41.6 billion in 2021. As part of that increase, the Netherlands’ green and social bond issuances rose from 2021 (up $2.6 billion and $2.4 billion, respectively), likely because of concrete regulatory development.

ESG bonds were at the center of the country’s climate initiatives in 2022. The Netherlands also updated its Green Bond Framework to align with the EU’s Green Bond Standard and the EU Taxonomy in 2022, becoming the first country to do so.

These steps provided the country with a clear regulatory path going forward.

France’s Bond Issuances

The US has led in sustainability bond issuances for the past several years, but that lead narrowed in 2021, when this type of issuance fell.

In fact, sustainability bond issuances fell in all survey countries except for France, which saw a $1.3 billion increase in these bonds from 2021 to 2022. However, France saw a larger decline than the US in ESG bond issuances between 2021 and 2022, when $122.6 billion and $86.8 billion in bonds were issued, respectively.

While the French sustainability bonds aren’t linked to the EU’s standards like the Netherlands’ are, they do adhere to the AFD’s Sustainable Finance Framework, which provides a degree of regulatory backing.

Germany’s Bond Issuances

Germany issued $71.8 billion in ESG bonds last year, down from $81.8 billion in 2021. The German ESG bond market is largely comprised of green bonds, which were part of the decrease from 2021.

Notably, however, Germany last year extended its Green Bond Framework to include social criteria, and social bond issuances have increased since then (most recently by $600 million from 2021 to 2022).

While France, Germany, Netherlands, and the US have all increased their total ESG debt issuances from 2019, the European countries that I surveyed—unlike the US—each also increased their issuances of at least one ESG bond type last year. This development may signal that strong regulatory backing has insulated and could continue to insulate European debt issuers from the post-pandemic drop-off that the US is experiencing.

Alleviating Regulatory Uncertainty

Many of the SEC’s ESG-related proposed rules are likely to be finalized this year, and the increased certainty that comes with finalization will likely alleviate some of the hesitancy in the US to take on ESG-related debt.

The ESG bond market may even bounce back before 2023 is up if the rules are finalized early enough in the year, and if that’s the case, look out for a bond market similar to that of other leading countries.

Bloomberg Law subscribers can find related content on our ESG Practice page, as well as our Practical Guidance: Sustainable Finance page. Bloomberg’s ESG scores are available on the terminal at BI ESG <GO>.

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