ESG Instruments Drive Record Revenue for Financial Institutions
Banks are experiencing a financial windfall from underwriting ESG (Environmental, Social, and Governance) bonds, even as they face criticism for their role in financing the fossil-fuel industry. Data from Bloomberg reveals that in 2023, banks earned an estimated US$3.6 billion in fees from facilitating ESG bond sales, more than double the US$1.6 billion generated from fossil-fuel-related debt issuance.
This rapid growth underscores the rising global interest in ESG investments. Approximately US$750 billion worth of ESG-related bonds have been issued so far this year, surpassing the US$468 billion issued throughout 2020. Despite concerns about “greenwashing” — where investments may not fully align with their advertised environmental or social objectives — banks are capitalising on the escalating demand for sustainable financial instruments.
Banks Follow the Market’s Lead
Investment banks, driven by customer demand, are aligning their services with the burgeoning interest in ESG bonds. Analyst Jeff Harte of Piper Sandler Cos noted, “Banks respond to client preferences, and the appetite for environmentally-friendly bonds is only increasing.” Additionally, regulatory and political pressures are encouraging financial institutions to engage more actively in sustainable financing.
Shift in Market Dynamics
JPMorgan Chase & Co., a major player in debt underwriting, exemplifies this shift. Once heavily reliant on fossil-fuel debt, the bank now earns 13 per cent of its bond underwriting fees from ESG instruments, a significant jump from 5 per cent in 2022 and 2 per cent in 2018. In 2023, JPMorgan earned US$223 million in fees from ESG bonds, outpacing the US$94 million generated from fossil-fuel-related debt.
Other banks are also expanding their ESG portfolios. BNP Paribas now derives 21 per cent of its underwriting fees from ESG bonds, a sharp rise from just 1 per cent five years ago. Similarly, Credit Agricole leads globally, with 31 per cent of its fees this year linked to ESG-related transactions.
Profitability and Sustainability
Analysts anticipate continued growth in this sector. Mike Mayo of Wells Fargo Securities compared the ESG financing trend to the early stages of a baseball game, remarking, “We’re only in the first inning.” However, he also highlighted the scale of the challenge, noting that addressing climate disruptions would require five times the current funding levels.
Banks, as profit-driven entities, are well-positioned to facilitate this financial transformation. Mayo concluded, “What benefits the environment and society can also enhance banks’ profitability.” As the demand for ESG instruments grows, financial institutions are poised to play a central role in the transition to a more sustainable economy.
