The Transatlantic Divide in Green Finance Persists in the US
The environmental, social, and governance (ESG) space in the United States is experiencing a challenging period, according to recent data on sustainable bond issues and flows into funds that prioritize investments in a cleaner world economy. The transatlantic divide in attitudes towards green finance seems to be far from disappearing, as US companies show a cooling interest in “sustainable” debt.
ESG has become a contentious acronym in the US, with Republican politicians criticizing what they call “awakened capitalism” and efforts to restrict funds for oil and gas. This controversy appears to be weighing on the minds of chief financial officers, as there has been a significant decline in corporate bond issuance related to sustainability pledges.
The Climate Bonds Initiative, a non-profit organization that tracks the issuance of bonds raised for specific financial, environmental, and social projects, as well as bonds linked to meeting goals like reducing carbon emissions, reported a 39% decline in the issuance of such bonds in the US during the first half of this year compared to the same period in 2022. The value dropped from $65 billion to $39.8 billion. In contrast, sustainable bond volumes globally saw a 15% decline, and there was only a 10% decrease in all bond issuance types, driven by higher interest rates that increased the cost for issuers. Europe, on the other hand, experienced a 3% increase in bond issues, rising from $224.4 billion to $231.5 billion.
The Climate Bonds Initiative suggests that the decline in the US may be a result of the “anti-ESG political rhetoric” prevalent in the country. This political climate may also explain the decrease in demand for sustainable investment funds among US-based investors. According to Morningstar data, US-based sustainable funds saw outflows of $635 million between April and June, whereas European-based funds received inflows of $20 billion during the same period.
Some skeptics argue that fluctuations in the green debt market may not have a significant impact on the environment or companies investing in the energy transition. They point out that the relationship between green finance and lower costs for sustainable projects is unclear. Sustainable bonds have primarily been used as a “communication” and “green signaling” tool to showcase an issuer’s sustainable credentials. Therefore, it’s not surprising that the issuance volumes vary depending on the political context and the expected consequences for reputations and licenses to operate.
Shrinking Market for Carbon Offsetting
Another significant development in the sustainable finance landscape is the shrinking market for carbon offsetting. Companies that previously relied on carbon market credits to offset their emissions are now decreasing their purchases, causing prices to drop and raising questions about the role of the market in corporate climate change policies.
The carbon market works by allowing companies to offset their emissions by financing activities that help reduce the amount of carbon dioxide in the atmosphere. This can include initiatives such as carbon capture and storage or reforestation. However, claims have emerged that companies using carbon credits are sidestepping their climate responsibilities by purchasing offsets instead of addressing the underlying emissions of their business operations.
Companies like Delta Air Lines, easyJet, Nestle, and Kering have recently announced plans to reduce or halt their use of carbon credits. These decisions have contributed to a decline in the number of carbon market credits taken by companies for offsetting purposes. Trove Research, a consulting firm, reported a 9% drop in retired credits in the first half of 2023 compared to the same period in 2022. This has resulted in an oversupply of carbon credits, with prices falling by 10.9% from last August.
The decline in demand for carbon credits is driven by controversies surrounding their effectiveness. Critics argue that the offsets overestimate the amount of carbon saved and accuse companies of greenwashing. In response, some environmental organizations have called for stricter regulations, suggesting that companies should only use offsets after they have made efforts to reduce their emissions.
Implications and the Path Forward
The cooling interest in sustainable finance and the declining market for carbon offsetting in the US raise important questions about the future of ESG in the country. The political climate and controversies surrounding green finance appear to be influencing the behavior of companies and investors.
However, it is crucial to recognize that fluctuations in the green debt market and the carbon offsetting market do not negate the urgent need to address climate change and transition to a sustainable economy. While some companies may be reducing their purchases of carbon credits, it is essential to focus on implementing comprehensive emissions reduction strategies and investing in sustainable initiatives.
In this changing landscape, it is vital for companies and investors to navigate the complexities of green finance with transparency and accountability. Stricter regulations and clearer guidelines can help restore trust in sustainable bonds and carbon offsetting. Additionally, businesses should prioritize real emissions reductions and investments in sustainable practices rather than relying solely on offsets.
Ultimately, the challenges faced by the ESG space in the US present an opportunity for companies and investors to reevaluate their approaches to sustainability. By embracing comprehensive strategies and genuine commitments to reducing their environmental impact, they can contribute to a cleaner and more sustainable future.
Summary:
The United States is experiencing a decline in sustainable bond issuance and interest in sustainable investment funds, indicating a persistent transatlantic divide in attitudes towards green finance. The controversy surrounding ESG in the US, driven by anti-ESG political rhetoric, appears to be affecting corporate bond issuance and investor sentiment. Additionally, the market for carbon offsetting is shrinking as companies reduce their purchases of carbon credits amid concerns over their effectiveness and accusations of greenwashing. The challenges faced by the ESG space in the US underscore the need for clearer guidelines, stricter regulations, and a focus on comprehensive emissions reduction strategies to ensure genuine sustainability efforts.
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HI. Not a pretty picture for the environmental, social and governance space in the US. At least this according to the latest data on sustainable bond issues and flows into funds that promise to invest in a cleaner world economy. These show that the transatlantic divide in attitudes towards green finance shows no signs of disappearing.
Even today, as tourists take to the skies, there is something the aviation industry has decided to leave behind: carbon credits. What was once an indicator of corporate responsibility has become a potential liability, due to concerns about greenwashing. — Kenza Bryan
US companies cool over “sustainable” debt.
ESG has become a controversial acronym in the United States, where Republican politicians have railed against “awakened capitalism” and attempts to squeeze funds for oil and gas.
The controversy could weigh on the minds of chief financial officers, judging by a sharp decline in corporate bond issuance linked to sustainability pledges.
The non-profit Climate Bonds Initiative has been tracking the issuance of bonds that raise funds for specific financial, environmental and social projects, as well as bonds with redemption rates linked to meeting goals such as reducing carbon emissions.
It found that issuance of all these types of bonds in the United States fell 39% in the first half of the year compared to the same period in 2022, from $65 billion to $39.8 billion.
This was a much steeper decline than the 15% decline in sustainable bond volumes globally in the first six months of the year and Dealogic’s estimate of a 10% decline in all bond issuance types, driven by high interest rates that have pushed up the cost to issuers. In Europe, the value of issues rose 3% from $224.4 billion to $231.5 billion.
The CBI said “anti-ESG political rhetoric” in the US may have been a contributing factor to the decline in that region.
The US political climate may also be underpinning a national dent in appetite for sustainable investment funds. US-based funds marketed as sustainable saw outflows of $635 million between April and June, compared with $20 billion inflows for those based in Europe, according to Morningstar data.
Some observers are skeptical that fluctuations in the green debt market will affect the planet or companies investing in the energy transition, citing an unclear relationship between green finance and lower costs for sustainable projects.
Sustainable bonds have primarily been used as a “communication” and “green signaling” tool to demonstrate an issuer’s sustainable credentials, Mickaël Mangot, chief scientist at think tank 2 Degrees Investing Initiative, told Moral Money.
It is therefore not surprising that the volumes vary “depending on the political context and the expected consequences for [issuers’] reputation or license to operate,” Mangot argued. (Kenza Bryan)
The market for carbon offsetting is shrinking
The number of credits taken from the carbon market by companies using them for offsets has decreased © REUTERS
Moves by Delta Air Lines, easyJet and other high-carbon companies to cut carbon credit purchases have helped drive down prices and raise questions about the role of the market in corporate climate change policies.
The market works by allowing companies to offset the release of emissions by financing separate savings of carbon dioxide from the atmosphere, for example by storing CO₂ underground or planting trees.
The latest estimates place the value of voluntary carbon credits in circulation at about 2 billion dollars. But in the first half of this year the market has been hit by claims that companies using carbon credits are sidestepping their climate responsibilities by buying offsets for the carbon dioxide they emit instead of fixing the underlying business.
“Five years ago investors were eager for companies to buy high quality credits and now, in very binary terms, market participation is seen as negative,” said Luke Sussams, regional head of ESG strategy and sustainable finance at Jefferies Investment bank.
Some of the biggest buyers of carbon credits, including Delta Air Lines, JetBlue and easyJet, as well as Swiss food giant Nestle and French luxury group Kering, have said in recent months they would stop or slow down their use of carbon credits. , after the methodology behind this market was hit with controversy.
Delta Air Lines, which posted its highest earnings in its history last month, accounted for more than a tenth of all carbon credits used between 2020 and 2022, according to consulting firm Trove Research. Delta used these purchases to describe itself as “the world’s first carbon-neutral airline”.
But the use of this label has been disputed in a class complaint filed in California in May. The lawsuit referred to an investigation by The Guardian and others which argued that more than 90% of rainforest conservation offsets overestimated the amount of carbon saved. Verra, the largest accreditation body for voluntary credits, has strongly disputed these claims. Delta did not respond to a request for comment.
The number of carbon market credits taken by companies using them to offset their emissions fell to 85 million in the first half of 2023, a 9% drop from the 93 million “retired” in the first half of 2022, according to Trove.
This pushed the oversupply of carbon credits to nearly five times annual demand at the end of June. Voluntary credit prices averaged $8.20 per ton of carbon at the end of June, a 10.9% drop from last August.
In theory, lower prices should encourage carbon emitting companies to buy more offsets. However, controversy over the effectiveness of offsets has led companies to cut back on purchases for fear of being accused of greenwashing.
Guy Turner, the founder of Trove, said companies have “stopped to think, for good reason.” He hoped this would lead to tighter emissions controls and incentivize airlines to invest in sustainable aviation fuels to reduce, rather than offset, emissions.
But in practice, some companies that have pulled out of carbon markets might “do absolutely nothing and just shut up and hope it goes away,” he said.
Some environmental organizations have tried to boost confidence in carbon markets. The Voluntary Carbon Markets Integrity Initiative released rules in June suggesting companies use offsets only after they cut emissions. Verra is expected to change its rules later this year. (Kenza Bryan)
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