A $1.5 Trillion ‘ESG’ Debt Market Has Started Bleeding Clients

(Bloomberg) — In the world’s second-biggest ESG debt market, corporate clients are starting to walk away.

Most Read from Bloomberg

Extra regulatory requirements, fewer financial incentives and the risk of being accused of greenwashing are putting off clients who just a few years ago were champing at the bit to attach an environmental, social or governance label to their financing, according to bankers and lawyers close to the market.

The products in question are so-called sustainability-linked loans, a market that BloombergNEF has estimated is worth $1.5 trillion, making it second in size only to the global market for green bonds. Largely unfettered by regulations, borrowers and financiers have been relatively free to construct their own standards for SLLs. But as financial watchdogs start to erect guardrails around ESG labeling, a broader market retreat appears to be underway.

Last year, issuance of SLLs plummeted 56% to $203 billion, according to data compiled by Bloomberg. Though 2023 was a tough year across debt markets, the decline for SLLs was almost twice as precipitous as it was for green loans. What’s more, green loan sales have roared back to life in 2024, while SLL issuance has continued to decline, having plunged 74% so far this year, the Bloomberg data show.

Rachel Richardson, head of ESG at London-based law firm Macfarlanes, says this year might be “a bit of a crunch point for both borrowers and lenders” in the market for sustainability-linked loans.

“When it comes to refinancing SLLs from three or four years ago, both borrowers and lenders are going to have to have a really hard think about where the market was then — in its total infancy — and where the market is now,” Richardson said. The question then becomes “whether it’s still appropriate for them to continue borrowing via an SLL.”

Story continues

A key factor behind the slide in SLL issuance is the enforcement of a European Union regulation requiring companies to document…