Banks cashing in on ESG bonds amid climate crisis

(BLOOMBERG) – While many banks have been condemned for contributing to the climate crisis by helping fossil fuel producers raise cash in debt markets, the banking industry as a whole is making more money from underwriting ESG-related bond sales.

Banks have earned about US$3.6 billion (S$4.9 billion) in fees this year from arranging sales of bonds advertised as instruments of green, social or sustainable development for companies, governments and other organisations, according to data compiled by Bloomberg.

That’s more than double the US$1.6 billion that banks have pocketed so far this year from issuing debt for fossil-fuel companies.

The numbers provide further evidence of the seemingly unrelenting cascade of money pouring into environmental, social and governance (ESG) investing. About US$750 billion worth of ESG-related bonds have been issued this year, compared with US$468 billion during all of 2020, Bloomberg data shows. Whether those bonds actually fund what they say they fund is another question, given the growing phenomenon of greenwashing, as industries scramble to mollify governments and consumers increasingly attuned to the consequences of climate change.

Analysts say when it comes to the banks, they are just doing what they do: They’re following the money. “Investment banks are almost always driven by what customers want, and demand for environmentally friendly bonds isn’t going to wane any time soon,” said Mr Jeff Harte, an analyst at Piper Sandler.

He added that there are growing regulatory and political pressures on the financial industry to do something about the deteriorating state of the planet, and that is also providing an incentive to participate in ESG.

JPMorgan Chase & Co, the world’s top debt underwriter, is the No. 1 arranger of bond sales for the fossil fuel industry. But despite its role in assisting those companies most responsible for global warming, even JPMorgan has become more reliant on ESG.

Almost 13 per cent of the bank’s total bond underwriting business now comes from issuing ESG-related debt instruments. That’s up from 5 per cent last year.

For the first time, JPMorgan is earning more in total fees from underwriting ESG debt – US$223 million so far this year – than it is from arranging bond sales for fossil-fuel companies – US$94 million. By comparison, in 2016, the lender pocketed US$16 million from ESG sales and US$107 million from fossil-fuel debt sales.

What’s happening at JPMorgan is mirrored across most of the industry. Take BNP Paribas – the giant French bank now generates 21 per cent of its overall debt underwriting fees from ESG, compared with 1 per cent as recently as five years ago.

Among the world’s largest banks, Paris-based Credit Agricole is most focused on ESG, with 31 per cent of the company’s debt underwriting generated this year coming from that part of the market. At Citigroup, the figure is 11 per cent, but that is up from 0.5 per cent in 2016.

Mr Mike Mayo, an analyst at Wells Fargo Securities, said he expects the numbers will only get bigger. “These are very early days in facilitating ESG and climate financing,” he said. “In baseball terms, we are in the first inning.”

Still, even if all that debt was truly funding solid ESG initiatives, the world would need five times more money to address climate disruptions. The banks, Mr Mayo said, are more than happy to help make that happen.

“The reality is what’s good for the environment and society can also be good for banks’ profitability,” he said. “And after all, we’re talking about for-profit institutions here.”