Ever wondered that climate change and sustainability will affect banks and the corporate world? Well, here we are standing at the juncture to decide whether to go extinct or save the world. But yes, finance is ubiquitous.
There has been an increasing trend in the ESG Bonds. What are they?
ESG Bonds stand for Environmental, Social, and Governmental Bonds. A bond is simply a financial asset representing a loan made by an investor to the borrower. The borrower here could mean the government bonds or the corporate bonds (bonds issued by a company to raise money).
ESG bonds are gaining attention in financial markets as companies seek to increase their “green” or sustainability credentials by focusing on renewable energy, pollution reduction, or climate change adaptations and initiatives.
Companies issuing ESG bonds are not only addressing their increasingly scrutinized role as corporate citizens but are also attracting new waves of socially-minded investors that are supportive of ESG initiatives. Climate change concerns in recent years have pushed both investors and companies to incorporate ESG into their corporate operations or investment portfolios. It simply means that ESG bonds are financial investments to fund those projects that are environment-friendly.
The opulence in these bonds is justified because “climate change,” “sustainability,” and “green energy” are the sizzling talks of the town. And the best part? We humans, as investors, have started to realize the vulnerability of climate change and are indirectly contributing to making the planet more liveable. How you ask?
Well, the rise in the issue of ESG bonds has made the companies more vigilant about sustainability and climate change issues. It has motivated companies to invest more in climate-friendly technologies.
ESG bonds have also helped banks to make money, with JP Morgan bagging the most significant gain. To gauge how banks have benefitted, we need to understand what “Underwriting” in this context means.
So typically, banks arrange the sales of ESG bonds. However, if 100 bonds are on sale, but only 60 are sold, what does the bank do with that surplus of 40 bonds? The bank gets a fee for putting up the sale of 100 bonds and the bank buys that surplus of 40 bonds. This process is called underwriting. The bank is allowed to sell these bonds to the open market once the trading of these bonds starts. The banks can make a profit/loss by selling these bonds at a higher/lower price than they bought.
Here are some mind-boggling statistics as quoted by Bloomberg,
While many banks have been condemned for contributing to the climate crisis by helping fossil fuel producers raise cash in debt markets (by issuing loans), the banking industry as a whole is making more money from underwriting ESG-related bond sales.
Banks have earned about $3.6 billion in fees in 2021 from arranging sales of bonds advertised as instruments of green, social or sustainable development for companies, governments and other organizations, according to data compiled by Bloomberg. That’s more than double the $1.6 billion banks pocketed so far this year from issuing debt (giving loans and getting interest on them) for fossil-fuel companies.
Bloomberg data show that about $750 billion of ESG-related bonds have been issued this year compared with $468 billion during 2020.
However, one question persists. Is this just a new method by corporations to raise money, or is this money going into sustainable energy? No matter what the answer, the worst part — Even if all this debt were indeed funding solid ESG initiatives, the world would need five times more money to address climate disruptions, emphasizing how fragile the planet is.
Banks after underwriting USG bonds be like 👇
Bottom line?
ESG Bonds are one serious attempt to save the planet from further deterioration. These bonds will continue to emerge significantly in the future. Let us know your thoughts on the same.
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Interesting facts about ESG Bonds
- The World Bank issued its first green bonds in 2008 and remains one of the largest issuers of such bonds.
- For the first time, JPMorgan is earning more in total fees from underwriting ESG debt — $223 million so far in 2021 — than from arranging bond sales for fossil-fuel companies — $94 million.
- Among the world’s largest banks, Paris-based Credit Agricole SA is most focused on ESG, with 31% of the company’s debt underwriting generated this year coming from that part of the market.
- ESG bonds consist of two types of bonds- Green Bonds and Sustainability-Linked Bonds.
Global News from all around the world
- Vedantu enters the Unicorn Club by raising 100 million USD in a recent round of funding.
- Ola electric raises 200 Million Dollars in funding, leading to its valuation at 3 Billion US Dollars!
- Patanjali founder Ramdev’s attempt to get his followers to invest in Ruchi Soya Industries during a yoga session has landed him in a regulatory soup. The Securities and Exchange Board of India (Sebi) has asked Ruchi Soya to explain why the yoga guru violated regulatory norms.
- Snapchat has the most extensive user base in India after the US.
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