New worry that ESG investing is bubble as bonds pass $1 trillion

Another $450 billion green bonds expected for 2021 but one strategist contends ESG a passing investment fad.

The investing world of environmental, social and governance just broke through another barrier, and the growth is starting to raise questions (and even concern) about how much bigger it can get.

Total green bond issuance topped $1 trillion in the past week, joining ESG-focused funds that have a similar amount in assets under management. In the past month alone, more than $50 billion of green bonds were sold, including debuts in Germany by a trio of automakers including Volkswagen, and JPMorgan, the biggest U.S. bank by assets, according to data compiled by BloombergNEF.

Is it a bubble? Jared Dillian, an investment strategist at Mauldin Economics, wrote this week in Bloomberg Opinion that he thinks it just might be. “ESG is nothing but a passing investment fad, not unlike smart beta, the BRICs, structured products or any of the myriad market bubbles over the last 25 years, small and large,” he said. 

Still, analysts at Bank of America expect another $450 billion of green, social and sustainable debt to be issued in 2021, roughly equaling this year’s issuance. Sales of green bonds, where proceeds are ring-fenced for environmental projects, will account for “the bulk” of the transactions, Bank of America said.

The Bank for International Settlements, which is often dubbed the central bank for central banks, said last month that it has seen no proof that green bonds result in lower corporate carbon emissions. The median change in carbon intensity—the ratio of carbon emissions to revenue—of green bond issuers has been minimal over time, the BIS said.

Concern about the lack of standards in the green bond market surfaced in a big way in 2017 when Spanish oil company Repsol SA became the first major refiner to sell the securities. Since then, energy companies such as Saudi Electricity have sold debt.

Investors are growing increasingly anxious about how the funds raised from green bond sales are being used, said Josh Olazabal, head of ESG and Sustainability at CreditSights Inc. 

“It’s definitely something that a lot of investors are talking about, and they’re seeking more specific details from companies and better assurances from third-party sources,” he said. “Especially as green bond issuance expands to non-traditional issuers in more diverse sectors, they want to know where the proceeds are going and how green they are.”

[More: Faith-based investing catches a ride on the ESG wave]

So far, there haven’t been any notable cases of “greenwashing,” but that is an overhanging concern for purchasers of green bonds, Olazabal said.

It also explains why lawmakers in Europe want to establish a set of standards by next year for what really counts as “green” for projects that are funded by such debt. The European Union needs the rulebook before the region goes ahead with its planned 225 billion euro ($265 billion) offering of green securities.

“The integration of environmental, social and governance criteria has never been more important for investors than in 2020,” said Maia Godemer, a sustainable finance associate at BNEF, which tracks green bond issuance. “It is not only likely that these varieties of financing will grow in volumes in coming years, but we will see further innovation.”

More than half of this year’s $200 billion of green bond sales came from Europe, the Middle East and Africa. The growth has now pushed the wider sustainable debt market to more than $2 trillion, BNEF reported. That includes bonds to fund social projects, which have seen a three-fold jump this year in the wake of COVID-19.