Sustainable Investing- How ESG Bonds Are Raising Concern Among Investors

Business Standard Sustainable investing: How ESG bonds are raising concern among investors

Japanese real estate firm Hulic Co. recently joined a handful of borrowers worldwide in selling so-called sustainability-linked bonds, but the market's reception has been underwhelming.

A new type of bond that penalizes issuers for failing to meet social and environmental goals is raising concern among some investors that buying the debt may not be all that ethical.

Japanese real estate firm Hulic Co. recently joined a handful of borrowers worldwide in selling so-called sustainability-linked bonds, but the market’s reception has been underwhelming. Such securities offer an extra coupon if the issuer fails to meet goals, and for some investors that raises a troubling question: is it really ethical to profit from a company missing its green or social targets?

The muted reaction is fueling an early debate about whether the booming market for environmental, social and governance (ESG) investments risks skewing incentives for issuers. There have also been broader concerns that the cutting-edge laboratory of ESG bond design sometimes churns out structures that have design flaws. Many investors have struggled with other structures, for example, to figure out what’s really green and what’s “greenwashing” -- the use of misleading labels to create an undeserved image of environmental responsibility.

Hulic barely sold out its 10 billion yen ($96 million) of 0.44% notes last month, at a time when orders for other green bonds in Japan have far exceeded the supply.

Globally only about 10 issuers including Chanel Ceres Plc and Novartis AG have sold sustainability-linked securities after the world’s first such issuance last year from Italian utility Enel SpA. “If the issuer achieves its goal, a low coupon can be treated as a reward for them, which makes sense,” said Nao Kobayashi, deputy manager of the investment department at Mitsui Sumitomo Insurance Co. “But if it fails, a step-up coupon is considered as a penalty, and it doesn’t sound right for us to benefit from someone’s penalty.”