Analysts have said that the investment grade bonds of companies from high polluting industries in the US trade at tighter spreads than their European counterparts because US investors are less fazed when it comes to higher environmental, social and governance risks.
While bonds of that category in Europe trade at around 100bp over government bonds, high grade energy bond spreads in the US have tightened from around 100bp over Treasuries to half that spread since October 2020.
“This difference in trajectory is even more noticeable when considering that both energy indices have the same weighted credit quality and a large share of upstream and integrated energy issuers, which as mainly fixed cost operators benefit a lot from the rally in energy prices,” said Shanawaz Bhimji, senior fixed income strategist at ABN Amro.
Some believe the difference is down to differing attitudes towards ESG investing in the US and Europe. “The US domestic market is maybe five years behind Europe [in terms of ESG adoption],” said a syndicate banker in London. “It’s unusual for Europe to be the leader in something [when it comes to the bond market], but we’re way ahead of the US in this.”
The COP 26 summit in the UK this week could change perceptions in the US towards ESG finance, though it will take investors to lead the way, said bankers. “ESG started as a coalition of the willing,” said a sustainability banker in Europe. ”Over the last couple of years, it is much more institutionally driven.”
The US issuing a sovereign green bond, which has been mooted under president Joe Biden’s administration, would help. “When a government issues its first sovereign green bond,” said the sustainability banker, “it has a knock-on effect”.
The UK issued its first green bond at the end of September, printing £10bn that “will encourage others”, according to the sustainability banker. “If you look at social housing [in the UK], about 90% supply this year is green. I expect similar trends in utilities and real estate.”
The banker added that “green sovereign issuance, combined with the government’s finance roadmap, EU Taxonomy and COP 26 hosting, all make for an environment in the UK where, for corporates, there is a lot of institutional focus on their financing choices.”