The Association for Financial Markets in Europe (AFME) has unveiled its Environmental, Social, and Governance (ESG) report for the third quarter of 2024, highlighting significant advancements in the ESG finance sector.
Key Insights from the Report
The report indicates several notable trends, including:
- An influx of $122.75 billion into ESG funds during the quarter.
- ESG bond and loan issuance reached €116 billion in Q3 2024, marking a 6% increase from 2023, although this represents a 27% decline compared to the previous quarter.
- Green bonds continue to dominate issuance, yet overall figures remain below the levels seen in 2021 and 2022.
- While ESG securitization has risen, there has been a decrease in the issuance of sustainable, social, and sustainability-linked bonds.
Tatjana Greil Castro, co-head of public markets at Muzinich & Co, shared her insights on sustainability-linked bonds (SLBs). She noted that these bonds often suffer due to companies setting their own key performance indicators (KPIs), which are frequently perceived as lacking ambition by investors. Additionally, when targets are not achieved, the penalties are generally minimal, and the absence of a standardized framework complicates accountability. Furthermore, the establishment of KPIs sometimes lacks a clear and reliable validation process.
In terms of geographic performance, France, Germany, and Italy emerged as leaders in sustainable bond issuance. Notably, Italy accounted for 58% of sustainability-linked bonds (SLBs), while nearly half of all ESG bonds were issued in France or Germany.
The report also reveals that total ESG bond issuance experienced a slight decrease, moving from 14.2% to 14% of total European bond issuance between 2023 and 2024, down from 18% in 2022.
ESG Assets Under Management have reached unprecedented levels, with global funds adhering to ESG criteria hitting $10.5 trillion in Q3 2024, representing an 8.7% increase from Q2 and an 18.2% rise from Q3 2023.
Justine Leigh-Bell, executive director at the Anthropocene Fixed Income Institute, highlighted the factors contributing to the decline in sustainability-linked loans (SLLs) and SLB issuance. She explained that ESG-focused investors appreciate the clarity provided by green bonds, which are directly linked to specific investments supported by taxonomies and standardized reporting. The market has become well-defined for green bonds, while the classification of ‘social’ bonds remains limited, hindering their issuance figures.
Leigh-Bell emphasized the distinct operational characteristics of SLBs and SLLs, indicating that more stringent measures are necessary to ensure KPIs are met. She pointed out that a lack of financial motivation for investors often leads to lower KPI benchmarks. Additionally, the ambiguous regulatory landscape in Europe surrounding SLBs further constrains their growth potential.
She argued that the true potential of SLBs as instruments for transition financing is being overlooked, suggesting that financial incentives must be integrated to drive both performance and sustainability goals. Investors need to begin recognizing the intrinsic value of these options and encourage issuers to structure more ambitious SLBs.