ESG Financing – Market observations per 30 June 2023 –

Year on year ESG issuances fell slightly

• ESG bond & loan volumes fall slightly in Q1 ’23, volumes are down 15% year on year, but increased by 40% compared to the previous quarter.
• Following a relatively low Q4 ’22 and Q1 ‘23, ESG bond and loan volumes are down 8% over the twelve month period Q2 ’22 to Q1 ’23 in comparison to the twelve month period Q2 ’21 to Q1 ’22.
• Following the fall in overall issuances the 8% fall in ESG bond and loan volumes needs to be nuanced as the total volume of bond and loan issuances fell as well. In Europe ESG bond issuance, including ESG-labelled, sustainable-linked and transition bonds, represented 17.4% of total European bond issuance during Q1 ’23 in comparison to 21.3% in FY2022.
• A trend of agreeing sustainability goals and relevant KPI’s after a new facilities agreement has been signed and closed, becomes more common in the European market. A future alteration of the credit agreement allows corporates to meet deadlines without losing the ability to add sustainability clauses as they are ready.

ESG goals and cost of financing

• In the current market with relatively high interest rates investors are applying greater scrutiny to ESG goals and the margin reductions borrower's request. In part due to a squeeze on returns, investors are raising more concerns of greenwashing and require more stringent KPI’s to forfeit additional returns.
• Some investors predict an increasing pace of the energy transition driven by a falling cost of capital for low carbon energy producers and rising costs for producers of carbon intensive energy. In Europe, a clear differentiation in funding costs for the two groups is already seen. For example, a research from ING shows that the median greenium (the amount by which the yield on a sustainability linked bond is lower to a conventional bond) on the six largest green bond issuers amounted approximately 4 bps in 2022 and 3 bps in 2023 so far.