EU regulator finds link between green bond issuance and carbon trajectory

ESMA’s findings contrast with those of BIS, which last year found no correlation between carbon profile and green bond issuance

Europe’s market regulator has concluded that utilities, banks and energy companies that issue green bonds have decarbonised faster than non-green bond issuers in the same sectors. 

A report by the European Securities and Markets Authority, ESMA, has found that eligible green bonds issued in Europe between 2009 and 2019 are correlated to stronger entity-level reductions in carbon intensity.

The median carbon intensity of  firms domiciled in the European Economic Area dropped sharply from 2009 to 2019, with green bond issuers outperforming non-green issuers across all three sectors, the report said. The outperformance was particularly pronounced in the energy sector, where the median carbon intensity of green bond issuers dropped by 88% versus 27% for non-green. This figure was 36% versus 20% for banks and 54% versus 51% for utilities. 

Green bond issuers are also far more likely to report their emissions, with three quarters of the 67 issuers examined by the report disclosing emissions, versus just 40% for non-issuing firms in the same three sectors. However, reporting across all green bond issuers remains low, with just a fifth of global issuers disclosing Scope 1 and 2 emissions in 2019.

While the report’s authors included caveats about data availability and comparability, ESMA’s findings seemingly contradict a report by the influential central banking body, the Bank for International Settlements, last year, which found “no strong evidence that green bond issuance is associated with any reduction in carbon intensities over time at the firm level”. 

In fact, the BIS report found that green bond issuers in the utilities sector achieved smaller carbon intensity reductions on average.

The ESMA report also investigated the liquidity of green bonds versus non-green bonds, and found that bid-ask spreads – the difference between the highest a buyer is willing to pay and the lowest a seller is willing to accept – have on average been wider for green bonds by €0.01 since 2017, signalling lower liquidity. Other metrics used to indicate liquidity showed either no difference or slightly lower liquidity for green bonds. 

In contrast, a Climate Bonds Initiative report released yesterday concluded that green bonds consistently offered greater liquidity across 2020. The ESMA report takes issuance over a longer time horizon than the CBI study. Both reports, however, agree that green bond liquidity was not disproportionately affected during the Covid-induced market turbulence at the start of 2020, which the ESMA report says suggests “no particular vulnerability in the green segment of the corporate bond market”.