The Association for Financial Markets in Europe (AFME) has released its ESG report for the third quarter of 2024, seeing key developments in the ESG finance space.
Key findings of the report include:
- There was an inflow of $122.75 billion in ESG funds in this quarter.
- ESG bonds and loan issuance in Q3 2024 reached €116 billion – this is an increase of 6% from 2023, but a drop of 27% from the previous quarter.
- Green bonds have the highest issuance, but issuances remained below 2021 and 2022 levels.
- ESG securitisation increased, sustainable and social and sustainability-linked bond issuance decreased.
Tatjana Greil Castro, co-head of public markets at Global Credit, commented: “I believe the sustainability-linked bonds suffer from the fact that companies usually set their own key performance indicators (KPIs) which are often considered unambitious by the investors. Furthermore, if targets are not being met, the penalty for not meeting them is immaterial. There is no commonly agreed standard. And sometimes, KPIs have been put in place without allowing for a clear, transparent and validated process of measuring the set targets.”
France, Germany, and Italy ranked highest in sustainable bond issuance, with 58% of sustainability-linked bonds (SLBs) originating from Italy and nearly half of ESG bonds issued in either France or Germany.
Total ESG bond issuance has only slightly changed, going from 14.2% to 14% of total European bond issuance from 2023 to 2024, a drop from 18% in 2022.
The report found that ESG Assets Under Management have seen record highs, with global funds with ESG mandates reaching $10.5 trillion in Q3 2024, a 8.7% increase from Q2, and a 18.2% increase from Q3 2023.
Justine Leigh-Bell, executive director at the Anthropocene Fixed Income Institute, pointed out reasons why sustainability-linked loans (SLLs) and SLBs have seen a decline in issuance:
“ESG focused investors know what they are getting with green bonds as they are directly tied to the investments that are increasingly being underpinned by taxonomies and come with standardised reporting. The market has established itself to accommodate green bonds. Also to note, the sustainability label for use of proceeds bonds is challenged by the limited definition of ‘social’ which is why it has not been able to hit the same numbers as green bonds, historically.”
Leigh-Bell continued that SLBs and SLLs operate differently, therefore more is required to ensure KPIs are met, and investors lacking the financial incentives to do so, which leads to lower KPIs. Furthermore, the regulatory landscape in Europe is unclear on where SLBs lie, which limits growth.
“Our argument is we are missing the true potential of the SLBs as a transition financing instrument where financial incentives will be key to driving performance and meeting sustainability objectives. This requires investors to start pricing the option value and incentivise issuers to structure more ambitious SLBs.”