[Initial Insight] The Hidden Side of Quantitative Growth in 'ESG Bonds'

[Asia Economy Reporter Lim Jeongsu] An ESG (Environmental, Social, and Governance) craze is sweeping through the domestic capital market. In particular, the issuance volume of ESG bonds has been explosively increasing recently. According to data compiled by securities firms' investment banking (IB) sectors, the issuance amount of ESG bonds issued by public enterprises, financial companies, and general corporations has surpassed 50 trillion won this year. Excluding mortgage-backed securities (MBS) issued by the Korea Housing Finance Corporation, the amount exceeds 27 trillion won. Although less than half a year has passed, the issuance amount of ESG bonds is approaching the total amount issued last year.

The issuers and types of ESG bonds have also diversified. Until last year, issuance was limited to domestic public enterprises and some financial companies, but this year, private large corporations have been joining the ranks of ESG bond issuers one after another. Financial holding companies and banks have even attached ESG certification "labels(?)" to contingent capital securities and subordinated bonds issued to improve financial soundness. It is expected that once medium-sized companies also join the ESG ranks soon, the annual issuance volume of ESG bonds will easily exceed 100 trillion won.

An increase in issuance volume means that the ESG investment amount of institutional investors is also increasing accordingly. Led by the representative investor, the National Pension Service, large domestic pension funds, mutual aid associations, and asset management companies have successively declared ESG investments. As ESG investment amounts increase, companies have no choice but to join ESG bond issuance to raise sufficient funds at slightly lower interest rates.

A virtuous cycle structure has been formed, linking the expansion of ESG investments by large domestic institutional investors → increased demand for ESG bond investments → expansion of ESG bond issuance, resulting in a certain degree of quantitative growth in the ESG bond market. However, it is questionable whether qualitative growth is accompanying this quantitative expansion.

A chief investment officer (CIO) of a large domestic institutional investor recently expressed stress about ESG investments during a meeting. They said that ESG investments do not guarantee returns, yet they face considerable direct and indirect pressure to increase investment amounts. Another senior manager hinted that although they need to increase ESG investments, it is difficult to find suitable investment targets, so they increase total investment volume through ESG bonds, which have a large issuance volume.

From an investor's perspective, ESG bonds bearing names symbolizing ESG such as green bonds or sustainability bonds are, in terms of issuance structure or investment returns, virtually no different from general bonds. Nevertheless, they are pointed out as a convenient means to easily increase ESG investment amounts. Although ESG bonds do not help investment returns, they serve as a good tool for demonstrating to the outside world that an investment institution has a large ESG investment amount, and practically, they are useful for fund management evaluations?an ironic situation.

There are also criticisms that greenwashing is quite prevalent in ESG bonds. Greenwashing refers to gaining economic benefits solely from the eco-friendly image of a product. Applied to ESG bonds, it means using funds raised through ESG bond issuance for purposes other than investing in the relevant fields or failing to disclose implementation details.

For example, coal-related companies, which find it difficult to issue green bonds, may package bonds as "sustainability" or "social" bonds to raise funds. Because of this, in Europe, ESG determination is sometimes made by evaluating the ESG contribution of the issuing company rather than the use of the raised funds.

If qualitative growth does not accompany the quantitative achievements of ESG bonds, there is concern that the ESG trend may end up as a hollow "ESG cost burden."

Deputy General Manager, Corporate Analysis Department