About ESG bonds

Abstract

ESG bonds have emerged as a prominent theme in the bond market due to the increased issuance in green bondsfrom multiple issuers and the high demand they have generated. The issuance in ESG (Environmental, social, governance) bonds has occurred throughout the whole capital stack from covered bonds to sovereign bonds. ESG bonds, best defined as bonds whose proceeds are ring-fenced to a specific ESG project, are currently declined into green bonds, social bonds, and sustainability bonds depending on their use of proceeds. Green bonds have their proceeds ring-fenced for climate-related projects while social bonds address societal-related issued, sustainable bonds are a mix of both. Past research has already delved into this theme and found that green bonds provided a yield spread advantage relative to brown (non-ESG) bonds. However, past research has considered green bonds from all segments as a homogenous group that undergoes the same dynamics, which is arguably too approximative. The aim of this study is likewise to measure whether ESG bonds have performed better than their brown counterparts, but in a more refined way by measuring the performance of EUR ESG FIG, sovereign and SSA bonds separately in their respective segments. Furthermore, swap spread was used instead of yield spread. Performance of the selected bonds was assessed both in the primary bond market and in the secondary bond market. The primary performance was measured with two components, the book sizes (investor demand) and the new issue concession (the amount an issuer must pay over its outstanding curve). The secondary performance was measured in absolute (current spread – issuance spread) and relative terms, in other words where the bonds trades in swap spread compared to its outstanding secondary brown curve. The study suggested that ESG performance was quite fragmented depending on the specific bond segments. The Sovereign green, SSA green and FIG senior green segments performed relative to their brown counterparts and provided added value. This was not the case, however, for the green covered and FIG bail-in segments that underperformed relative to their brown counterparts.