Contentious ESG label dethroning green bonds, says former HSBC banker

investmentnews.com:

A former HSBC Holdings banker says one of the most criticized sustainable bond structures on Wall Street has the potential to dominate the roughly $6 trillion ethical debt market.

Sustainability-linked bonds, which tie interest payments to a company’s environmental or social goals, have to build trust and transparency for the market to grow, said Daniel Klier, chief executive officer of ESG Book, a data provider. Still, SLBs have more potential than the dominant green bond market, which will likely hit a ceiling, said Klier, the former global head of sustainable finance at HSBC. 

Borrowers can use money raised with SLBs to fund just about anything — including everyday operations — as long as they pledge to meet certain environmental, social or governance goals. Proceeds from green bonds, on the contrary, can only be spent on projects with a direct environmental impact. Those bonds make up the largest category of sustainable debt by amount issued.  

“The green bond market has its very natural limitations,” London-based Klier said in an interview. “As a treasurer, the worst thing that you can do is essentially compartmentalize your funding base. You want to have flexibility.”

Klier’s view is contrary to that of many others in the market given the sharp drop in sales of SLBs in recent quarters. Investors have become increasingly worried that companies’ targets lack ambition and the penalties that accompany the bond sales are immaterial. There’s also a growing concern that the label could expose issuers to potential legal risks. 

Governments and companies around the world, including Israeli drug maker Teva Pharmaceutical Industries Ltd., raised a total of $44.5 billion in SLBs through July 19, a 23.8% drop compared with the